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Registered Retirement Savings Plan – RRSP

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for retirement on a tax-sheltered basis.

An RRSP is an investment portfolio designated for retirement savings. It can contain a variety of investments including RRSP savings deposits, treasury bills, term deposits, mutual funds, bonds, and even equities.

What makes an RRSP special is that the contributions to it are tax deductible and the investment portfolio grows tax sheltered.

WHO SHOULD HAVE AN RRSP?

Every individual who works, files a Canadian income tax return, and looking forward to secure retirement should consider having an RRSP. Here’s why:

  • If you earn income through employment or self-employment, you can reduce your annual tax bill while saving for your future through an RRSP;
  • If you have a company pension plan, RRSPs add extra comfort that your retirement needs are met;
  • If you don’t have a company pension plan, RRSPs may be the foundation for funding your retirement;
  • Married couples where one spouse earns more income than the other can reduce their combined tax burden through a spousal RRSP. At retirement, an income-splitting strategy can be applied to reduce overall tax when the funds are withdrawn;
  • If you are planning on purchasing your first home or are interested in continuing your education, you can contribute to your RRSP, and then use these funds as a source of financing; and
  • If you anticipate fluctuations in your income because of maternity leave, career change or employment interruptions, the funds in an RRSP are always available to you, but tax will be payable on the withdrawal.

BENEFITS OF RRSPS

While designed specifically as a retirement vehicle, an RRSP has benefits throughout your lifetime.

  • By contributing to an RRSP throughout your working career, you will realize immediate tax benefits at a time when your income is generally highest. The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year;
  • The income earned in your RRSP is not taxed until it is withdrawn. While your investments sit in your RRSP, their growth is tax sheltered so the total value may grow more quickly;
  • By the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. So funds withdrawn at that time will benefit from this lower tax rate; and
  • Special features of RRSPs allow you to do further tax planning or use your RRSP to fund specific life events ie. Home Buyer’s Plan, Lifelong Learning Plan.

Home Buyer’s Plan

The Home Buyer’s Plan allows you to borrow funds from your RRSP to purchase your qualifying home. Here are some of the key facts:

  • You and your spouse can each withdraw up to $25,000 from your RRSP;
  • The funds must have been on deposit at least 90 days before you withdraw them;
  • At least 1/15 of the funds must be repaid each year, beginning two years after the funds were withdrawn, and if you do not, the amount due will have to be claimed as RRSP income that year; and
  • A signed agreement to buy or build a qualifying home is required.

LIFELONG LEARNING PLAN

The Lifelong Learning Plan allows you to pay for training or education with RRSP funds. Here are some important details:

  • You can withdraw up to $10,000 per calendar year to finance full–time training or post–secondary education;
  • The student can be you or your spouse, but not your children;
  • If the student meets disability requirements, then the training/education can be on a part-time basis;
  • The total amount that can be withdrawn is $20,000 with withdrawals over a maximum of four consecutive years;
  •  Amounts that are withdrawn are not subject to taxes on withdrawal; and
  • At least 10% of the amount borrowed must be repaid each year, over a maximum period of 10 years.

RRSPS IN ACTION

Let’s explore the immediate benefit of making an RRSP contribution for an individual with $80,000 in taxable income and a 32.5% combined federal and provincial tax rate.

No Contribution $5,000 RRSP Contribution
Taxable Income $80,000 $80,000
Combined Federal And Provincial $17,762 $16,137
Deferred Tax $0 $1,625

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*For illustrative purposes only

RRSP REGULATIONS

It’s important to understand the details regarding RRSPs. The rules governing all RRSPs are set out in the Federal Income Tax Act and are administered by Canada Revenue Agency . Below we have summarized the key aspects you should know.

ANNUAL CONTRIBUTIONS

A member may contribute to their RRSP until December 31 of the year in which they reach age 71. The following limits and deadlines apply annually.

Year Contribution Limit
2012 $22,970
2013 $23,820

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The allowable RRSP contribution for the current year is the lower of:

  • 18% of earned income from the previous year; or
  • The maximum annual contribution limit for the taxation year; or
  • The remaining limit after any company sponsored pension plan contributions.
  • Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income.

You will find the exact amount you can contribute to your RRSP for the current year on the Notice of Assessment you receive from Canada Revenue Agency after they process your previous year’s tax return.

COMPANY PENSION PLAN OR DEFERRED PROFIT SHARING PLAN

As a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RRSP must be reduced by the total value of the pension credits you earned for the year.

This amount is referred to as a Pension Adjustment (PA) and it is reported on the T4 slip (Statement of Remuneration Paid) that you receive from your employer.

ANNUAL CONTRIBUTION DEADLINE

To be eligible for an RRSP deduction in a specific taxation year, you can make contributions anytime during the year, and up to 60 days into the following year.

CARRY-FORWARDS

If you cannot make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. The amount of your unused contribution limit is shown on your federal Notice of Assessment.

You may also choose to delay claiming your current year’s RRSP tax deduction. To take the deduction in a later year, you must make sure that your allowable deduction limit has not been reached.

OVER CONTRIBUTING TO A PLAN

If you make an RRSP contribution beyond your maximum allowable amount for a year, it is considered an over-contribution. There is a lifetime allowance of $2,000 for over-contributions. These contributions must be used before any new contributions are applied.

TRANSFERS BETWEEN RRSPS

You may open as many RRSPs as you wish. You are free to transfer your RRSPs between financial institutions at any time without being subject to tax. You can also move some or all of your money between eligible investments within your RRSP.

WITHHOLDING TAXES

Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf.

The current following withholding tax rates apply:

Amount of RRSP Withdrawal All Provinces Except Quebec Quebec
Up to and including $5,000 10% 21%
$5,000.01 to $15,000 20% 26%
More than $15,000 30% 31%

yourfuture_rrsp_table3

You will receive a T4 RRSP receipt for any funds withdrawn during the year showing the amount to be included in your taxable income and the credit for the withholding tax.

SEPARATION OR DIVORCE

  • During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:
  • You are living apart when property and assets are settled; and
  • You have a written separation agreement or a court order.

DEATH OF A PLAN HOLDER

In the event of death, the proceeds of the RRSP are distributed to whoever was named as the beneficiary or to your estate, if no beneficiary has been designated. This designation can be specified in either your RRSP or in your will. Quebec residents must make the designation by will or marriage contract for most plans.

The proceeds of the RRSP will remain tax-sheltered if one of these situations applies:

  • Your surviving spouse is the beneficiary, and the proceeds are transferred into an RRSP or a Registered Retirement Income Fund (RRIF) in his/her name;
  • You have no surviving spouse, but you have children or grandchildren who are minors named as your beneficiaries. They are dependent on your estate for financial support and will have the proceeds transferred to a term annuity registered in their names; or
  • Children or grandchildren, regardless of age, who are financially dependent because of physical or mental infirmity. The RRSP proceeds
  • will be transferred to an RRSP or RRIF registered in their names, or used to purchase an annuity.

In all other situations, the balance of the RRSP at the date of death is included as income on the plan holder’s final tax return.

Types of RRSPs

RRSPs can be for an individual only or placed in the name of a spouse.

  • Individual RRSP– With an individual RRSP, the investments held in the plan and the tax benefits derived from it are yours.
  • Spousal RRSP – In a spousal RRSP, the plan is registered in the name of your spouse. If you are married or in a common-law relationship, you may choose to direct some or all of your RRSP contributions to a spousal plan. You still get the tax deduction, but the plan is registered in your spouse’s name. Your contributions to a spousal plan do not affect your spouse’s contribution limit to his or her own plan.
  • Group RRSPs – A Group RRSP is a collection of individual RRSPs offered to you by your employer. Contributions are taken from your pre-tax pay through payroll deductions, reducing your tax burden immediately. Contributions are then deposited into your RRSP as specified. At Lake View Credit Union, this product is offered through our investment partner, Credential Asset Management Inc. You can speak to our Wealth Services Manager regarding the set-up of this product.
  • Self-directed Plans – If you are the type of investor that enjoys managing all or a portion of your own portfolio, a self-managed RRSP may be the answer.  With such a plan, you can tailor your investments to meet your financial needs and manage your account(s) when it’s most convenient for you, any day, any time. This product is offered through our investment partner, Credential Direct®.

As you can see, RRSP contributions and rules can be quite complex, so we recommend you come into the branch to speak with an investment specialist.

On-line brokerage is offered through Credential Direct, a division of Credential Securities Inc., operating as a separate business unit. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund. ®Credential Direct is a registered mark owned by Credential Financial Inc. and is used under licence. 

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