In Canada, the Registered Retirement Savings Plan (RRSP) dates back to 1957, when it was called a registered retirement annuity and it remains today one of the most powerful tax savings opportunities for Canadians who want to save for their retirement years.
Unlike the Tax Free Savings Account (TFSA), RRSPs provide savings through tax deferral beginning in the year the contributions are made and a reduction in taxes owing, while encouraging the retirement savings process.
How RRSPs Work
An RRSP is a special savings account which is registered with the Canada Revenue Agency (CRA). Each Canadian taxpayer has an annual RRSP contribution limit which is based on their income, and has a maximum ceiling. Canadians put money into their RRSP and that deposit creates a tax deduction from the current year’s taxable income, as well as putting away money for retirement.
This deduction reduces federal tax obligations and may create a refund for the taxpayer. Unused RRSP contribution room carries forward indefinitely, so you could exceed your annual limit if you have previous years under the maximum.
Investments within RRSPs grow tax-free.
There is no capital gains or interest income declared for investments under a registered plan. Income from an RRSP is taxable upon withdrawal; however, once in retirement, your income is likely reduced, so that money coming from your RRSP is likely taxed at a lower rate.
Starting An RRSP
An RRSP itself is not an investment but a vehicle within which investments are managed. You start a plan, by contacting a financial institution, such as a bank, credit union, investment or insurance company, and they will handle the paper work involved with registration.
Each offers a variety of investments suitable for use within an RRSP, usually arranged by rate of return and risk. Low-return investments are generally the safest, using predictable securities, such as guaranteed investment certificates.
Medium- and high-risk investments offer long-term growth potential; however, returns can go up and down with market conditions over the short term. Your investing institution will guide you through a mix of investments that suit your investing preferences.
Types Of RRSPs
Individual plans are set up in the name of the contributor, who chooses investment options from those offered by the chosen financial institution. Self-directed plans allow RRSP holders to manage the investments within the plan themselves.
Trustee fees and transaction costs may apply, for which the plan holder is responsible. Group RRSP plans may be offered through your workplace, for which an employer may offer matching funds.
Group plans may be more restricted in investment options, and you may have fees to transfer plans if you leave the company.
Spousal RRSPs allow a form of income splitting, where the higher-earning spouse contributes to the other spouse’s plan, while retaining the deduction. In most cases, contributions to both plans by the higher-earning spouse may not exceed the personal contribution limit.
Contributing To An RRSP
Group RRSPs usually deduct employee contributions directly at payroll, and most financial institutions offer automatic withdrawals to aid you with small, regular payments. Making lump sum deposits, which you can usually make at any time, at the end of the tax year can help you reduce a tax amount owing or maximize the amount of your refund.
Your financial institution will issue two receipts for your contributions each calendar year.
The first covers January and February only, because the CRA allows you to credit these contributions to either the previous or current tax year, at your discretion. The second receipt covers the balance of the calendar year. This gives you some control over the best use of RRSP contribution amounts.
Finding Your Deduction Limit
Your last tax assessment or reassessment includes a statement of your RRSP deduction limit with your deduction limit listed on line A. The CRA may send you Form T1028 if there are any changes to your RRSP limits since your last assessment.
CRA My Account holders can use the online portal to access current and past year limits as well as a list of contribution amounts.
The Tax Information Phone Service (TIPS) allows you to access RRSP information and other tax-related information through a toll-free number.