Let's Talk About Your Registered Retirement Savings Plan (RRSP)

Registered Retirement Savings Plans (RRSPs) are available to help Canadians save for their retirement years.

I've heard about it before, but what exactly is an RRSP?

An RRSP is a special financial account that the government allows you to invest your money in and defer taxes on the growth. You also receive support in saving in an RRSP by way of a tax deduction for every dollar you contribute. The combination of these two benefits allow you to accumulate funds in a long term savings plan that you can draw from in retirement.

How Much Can I Contribute to my RRSP?

The amount you can contribute to an RRSP is noted on your Notice of Assessment that was sent to you from the Canada Revenue Agency (CRA) when you filed your tax return for the previous year. Another option is to call the CRA Hotline at 1-800-267-6999 to find out your limit, or you can calculate it yourself. Below we break down a simple way to calculate your RRSP contribution room.

Calculation for the 2017 tax year:

  1. Start with 18% of your 2016 earned income to a maximum of $26,010
  2. Add any unused RRSP Contribution room from previous years. This will be noted on your Notice of Assessment or by calling the CRA Hotline
  3. Deduct any Pension Adjustments (PA). This is supplied by your employer if you are a member of a company pension or DPSP plan. It is shown on your T4 and reflects the value of your employer’s contribution to your pension plan (or DPSP)
  4. Deductany Past Service Pension Adjustment (PSPA) This is reported to you in the current year, if applicable.
  5. Add any Pension Adjustment Reversal (PAR).This may apply if you left a pension plan/employer in the current year.

The resulting value will be your Contribution Limit for 2017.

What reasons do I have to invest in an RRSP?

There are three excellent reasons to put money into an RRSP.

1. Amassing funds for use in retirement.

The RRSP account is a great way to set money aside in a long-term savings plan to accumulate capital that can then be used to provide an income to you when you retire.

2. Tax deductibility.

Quite simply, eligible contributions are tax deductible, which allows you to pay less tax or get a tax refund from the government.

For example, if you invested $5,000 into an RRSP you effectively reduce your income earned for tax purposes by $5,000. If you are in a 40% tax bracket that would provide a tax benefit of $2,000, reducing the amount of income tax you have to pay, or providing you a $2,000 refund tax free. You can use that refund for anything you wish such as additional savings in a Tax-Free Savings Account for short-term needs; for a vacation or purchase you have been saving for or you can invest it into your RRSP and get more tax savings the next year.

3. Tax-deferred growth

Canadians don’t pay tax on the growth of the assets in their RRSP until it is withdrawn. This money is considered Tax-Sheltered. When you start to take income withdrawals in retirement, your income and taxation rate may be lower than your peak earning years and thus you will pay less tax on the growth.

Can I take money out of my RRSP before I retire?

The simple answer is that yes, you may make withdrawals or even terminate your RRSP any time prior to retirement, but any amount withdrawn will be taxed as ordinary income in that same year.

When you withdraw money from your RRSP, your financial institution must withhold tax from the total amount, effectively reducing the amount received, much like regular salaried payroll. The tax withheld may be claimed as a credit on your income tax return as income tax paid during that year.

There are two exceptions to the withdrawal rules and tax withholding.

1. Home Buyers’ Plan

This plan allows you to withdraw up to $25,000 from your RRSP to use toward the purchase of a home in Canada, without having to pay tax when the money is withdrawn.

The withdrawal from your RRSP must be returned to the RRSP in annual instalments over a 15-year period, commencing in the second year following the withdrawal. The Home Buyers’ Plan is intended for first-time buyers (or if you have not owned a home in the last five years) and is a way to help you save for a home down payment and getting some additional tax advantages.

2. Lifelong Learning Plan

This plan allows you to make tax-free withdrawals from an RRSP of up to $10,000 per year (not exceeding $20,000 overall), over a period of up to four calendar years. RRSP funds may be withdrawn under this plan where the recipient or their spouse is enrolled, or committed to enrol, as a “full-time student” in a “qualifying educational program” of at least three months’ duration at an “eligible educational institution.”

RRSP withdrawals under the Lifelong Learning Plan must be repaid to an RRSP in equal installments over a period of 10 years. Repayments must commence in the fifth year following the year of first withdrawal.

Contribution Strategy

It is important to come up with an RRSP contribution strategy that fits your financial plan. Some people choose to make regularly scheduled contributions to an RRSP, which makes it easier to stay on track with certain goals and can aid in a higher increase in your retirement savings. Contributing more frequently establishes a routine. Most importantly, when you make contributions as early as possible in the calendar year, those funds have the potential to grow tax-deferred for up to 14 months (the current calendar year, plus the first 60 days of the following calendar year).

Some people choose to make single lump-sum contributions once a year while others find it easier to budget around a monthly contribution amount.

Understanding how much you should invest into your RRSP, and making sure that the amount fits within your personal financial plan is very important. Our clients have this information in the Financial Plan that we prepared and monitor for them. If you don’t have a plan call us and we will help you create a retirement savings/financial plan with the goal of maximizing your disposable income, minimizing taxes and ensuring security for when you retire.