by Meiz Majdoub
Whatever your age or personal situation, it’s never too late to take advantage of the benefits a Registered Retirement Savings Plan (RRSP) can offer. It is important to understand RRSP basics to ensure you choose the right investment options for your RRSP.
A Registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for the future on a tax-sheltered basis. This means that any income you earn in the Registered Retirement Savings Plan is usually exempt from tax as long as funds remain in the plan. Both you and your spouse or common-law partner can contribute to RRSP. The total amount of your annual contribution can be deducted from your gross income at tax time. You have to pay tax only when you withdraw money from it. That generally happens when you are retired and at that time, you are in a lower tax bracket anyway. Moreover, you can carry your unused contribution limit from one year to another. By investing in registered retirement savings plans in income rich years and withdrawing in lower income years, RRSP’s allow you to postpone your income tax obligations to a later date. Your financial advisor can help you determine how much to contribute and when, so that you get maximum value for your earnings. Contributions must be made within 60 days of the year end to qualify. This year the RRSP Tax deadline is on March 1, 2019. Maximum contribution limit for 2018 is $26,230, although everyone has their own contribution limit which can be found on your 2017 Notice of Assessment or by calling Canada Revenue Agency (CRA).
An RRSP is an investment portfolio. It can contain a variety of investments including: RRSP savings deposits, treasury bills, guaranteed investment certificates (GICs), Segregated funds, bonds, and even equities.
An RRSP has various tax advantages. What makes an RRSP special is that your contributions to it are tax deductible and your portfolio grows tax sheltered. If you are under 72 years of age and earn income, we encourage you to take advantage of the benefits an RRSP can offer. RRSP’s are also a great option when one’s spousal earnings fall in the higher tax bracket than the other. The spouse earning the higher income should invest into a Spousal RRSP and they will get the deduction on the contribution. If the lower earning spouse withdrawals the money after 3 years, it will be taxed at the lower incomes marginal tax rate.
Every individual who works, files a Canadian income tax return, and looks forward to a secure retirement, should consider having an RRSP.
Here’s Why RRSP’S are worth investing in:
- Individuals who earn income through their employment or self-employment, can reduce their annual tax bill while saving for their future through an RRSP.
- For Individuals who have a company pension plan, RRSP’s add extra comfort that their retirement needs are met. For those that don’t have company pension plans, RRSP’s 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. The funds withdrawn tax free for the Home Buyers Plan has to be paid back over 15 years and the first payment is to commence after 2 years. The funds withdrawn for Continuing your Education are payable over 10 years and commence 1 year after withdrawal.
- 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.
- In some cases, borrowing to invest in RRSP’s may be worthwhile, but as in all borrowing, one must be careful to plan within one’s means. The refund on your taxes can be further used to pay back some of the loan. Speak to your Advisor.
RRSP’s provide a lifetime of Benefits:
- By contributing to an RRSP throughout your working career, you’ll 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. This can bring you to a lower tax bracket, therefore reducing the amount you pay in taxes that year. The actual amount of your savings is based on your marginal tax rate.
- The income earned in your RRSP is not taxed until it is withdrawn. While your investment sits in your RRSP, its growth is tax sheltered and 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 higher earning years. Funds withdrawn at that time will benefit from this lower tax rate.
- Special features of RRSP’s allow you to do further tax planning or use your RRSP to fund specific life events.
- Funds must be withdrawn (Rolled into a Registered Retirement Income Fund, RRIF) at the latest the year you turn age 71.
About the writer
Meiz Majdoub, B.Comm, is a financial professional with over 30 years of experience and is accredited with a CLU, CH.F.C. He is also a member of the Conference for Advance Underwriters (CALU). and the Estate Planning Council Of Ottawa. He has helped individuals, organizations and corporations attain their goals in the areas of Financial & Estate Planning, Insurance, Living Benefits and Employee/ Group Benefits. He can be reached at: 613-749-4007, or [email protected]