The Registered Retirement Savings Plan, also called the RRSP, is a tax-advantaged vehicle for saving and investing for retirement. Here’s what you need to know about the RRSP and how to use it for your retirement income.
How to Open an RRSP
You can open a registered retirement savings plan at banks, credit unions, insurance and trust companies. You must be at least 18 years old and a permanent resident of Canada. The age requirement to open an RRSP for British Columbia residents is 19 years.
The financial institution you open your account with will request personal information such as your name, address, and social insurance number.
There are different types of RRSPs. Some employers provide Group RRSPs to their employees for reduced management costs. You also have the option to contribute to a spousal RRSP, provided your spouse or common-law partner has an available RRSP contribution room.
Contributing To a Registered Retirement Savings Plan
You can contribute to your registered retirement plan until December 31st of the year you turn 71. You can invest your RRSP contributions in allowable financial assets, such as bonds, stocks, exchange-traded funds (ETFs), guaranteed investment certificates (GICs), real estate investment trusts (REITs), and mutual funds.
Investment income and capital gains are tax-free in a registered retirement savings plan, provided the money remains in your RRSP account.
The RRSP Contribution Room
Your RRSP contribution room, also known as the RRSP deduction limit, is the amount you can contribute to a registered pension plan. When calculating your contribution room, the CRA reviews contributions to a registered pension plan, pooled registered pension plan (PRPP), registered retirement savings plan, or a specified pension plan (SPP).
The RRSP contribution limit determines the annual funds you can contribute to your plan. This amount is the maximum amount you can claim when filing your tax return. When calculating your RRSP contribution room and deducting limit, the CRA uses 18 % of your earned income in the past year (not the current year), any unused deduction room from the previous year, other pension adjustments, and the current annual RRSP limit. You can carry forward unused RRSP deduction room indefinitely.
The CRA provides an annual RRSP limit that may change based on inflation rates. For 2021, this limit was $27,830, and this increased to $29,210 in 2022. For 2023 and 2024, the RRSP limit is $30,780 and $31,560 respectively. If you cannot contribute the total annual contribution room to your RRSP, you can carry the unused contribution room forward to the following year.
You must confirm your RRSP contribution room to avoid paying tax penalties on RRSP over-contributions. You can find your RRSP contribution room through your CRA My Account profile or check your deduction limit on the RRSP Deduction Limit Statement included with your notice of assessment or reassessment.
The CRA only forgives RRSP over-contributions that do not exceed $2,000. Should you over-contribute to your registered retirement savings plan for any reason, the CRA will request a 1% tax on the excess amount for every month it sits in your account.
It is also important to note that RRSP contributions up till March 31 of the current year can qualify for the RRSP deductions of the tax year. Your RRSP issuer will give you a receipt showing how much you contributed to your plan in the tax year.
RRSP Withdrawals
When you withdraw from a registered retirement savings plan, the Canada Revenue Agency (CRA) will tax the withdrawn funds, including contributions and investment income.
The RRSP tax deferral strategy is effective in retirement when many Canadians have lower taxable income and fall into a lower income tax bracket. The CRA will tax your RRSP withdrawals at your marginal tax rate.
However, your RRSP issuer may withhold taxes at the time you withdraw from your RRSP account. You must report your RRSP withdrawal as income when filing your taxes. The CRA will determine if you owe more taxes or qualify for a refund when they assess your tax reports.
The withholding tax rate may vary based on location and amount. The CRA’s required withholding rates on lump-sum payments are as follows:
- 10% (5% for Quebec) on amounts up to $5,000
- 20% (10% for Quebec) on amounts over $5,000
- 30% (15% for Quebec) on amounts over $15,000
You do not pay taxes on RRSP withdrawals that qualify for the Lifelong Learning Plan (LLP) and the Home Buyers’ Plan (HBP), provided you repay the loans as scheduled.
What Happens To Your RRSP When You Retire?
You can withdraw your RRSP or convert your plan to a registered retirement income fund (RRIF) or an annuity. An RRIF is a government-registered plan that pays you periodic income in retirement from your RRSP savings. On the other hand, an annuity pays you a specified amount from your plan every year.
Most Canadians open a registered retirement income fund by converting an existing registered retirement savings plan through the RRSP issuer by the end of the year they turn 71. After converting your registered retirement savings plan to an RRIF, you must withdraw an annual minimum income from it starting the following year. With a RRIF, you receive retirement income for life.
RRSP contributions are tax-deferred, and when you make RRIF withdrawals, you must report this income and pay the applicable taxes, usually at your marginal tax rate. Your RRIF issuer may withhold taxes and remit directly to the CRA. You can get your RRIF income details from your T4RIF Statement of Income from a Registered Retirement Income Fund.
Benefits of the Registered Retirement Savings Plan
- Use your RRSP to defer taxes until retirement.
- Contribute to a spousal RRSP and manage your taxes.
- Borrow from your RRSP to buy your first home through the Home Buyer’s Plan (HBP).
- Use the RRSP deduction to reduce your taxes when you file your income tax and benefits return.
For more ways to maximize your RRSP and pay minimal taxes in retirement, contact the DW & Associates Chartered Professional Accountants team.
