Registered Retirement Savings Plan (RRSP)
An Introduction to Registered Plans – Part 1
What is a Registered Retirement Savings Plan?
An RRSP is an individual account that has been registered with the Canada Revenue Agency (CRA). Because it is registered, allowable contributions are tax-deductible if they are contributed in the year or within 60 days after the end of the year. Furthermore, any income earned within the RRSP grows tax-free – is deferred – until it is withdrawn.
Can anyone open an RRSP?
There is no lower age limit to open an RRSP. You simply need to have earned income, which typically comes from your salary, wages or commissions.
There is, however, an upper age limit. You can contribute to an RRSP until December 31 of the year you turn 71.
You also need to have earned income. Someone who is not employed, or who does not have some other recognized form of earned income, is ineligible to contribute. The traditional example is the stay-at-home wife.
What is a spousal RRSP?
An RRSP only defers income. Eventually, when the contributions and growth are withdrawn to help fund your retirement years, you need to pay the deferred taxes. If only one party in a household worked and contributed to an RRSP, then the income tax payable in retirement could be quite substantial for the partner with the RRSP and very low or non-existent for the other partner, resulting in more tax being paid.
However, thanks to the option of a spousal RRSP, the income-earning partner can contribute to the spousal RRSP owned by the spouse or common-law partner. The income-earning spouse receives the tax deduction, as usual. At retirement, when withdrawals commence, both the partner who has been earning an income over the years and the non-income-earning spouse will report income, but most likely at a substantially lower tax rate, resulting in less tax being paid.
What can I put in an RRSP?
First, let me address some language that may indicate a misunderstanding. I have heard people say that they “bought an RRSP.” This suggests that an RRSP can be purchased. However, you would do better to regard the RRSP as a container within which you can buy a wide variety of financial assets. Among them are:
- Savings accounts
- Guaranteed Investment Certificates (GICs)
- Mutual funds
- Exchange Traded Funds (ETFs)
- Your own mortgage
How much can I contribute to an RRSP?
The CRA advises you of your contribution limit in your latest Notice of Assessment. Your contribution limit is the lesser of 18% of your previous year’s earned income and the annual RRSP contribution limit ($26,500 in 2019) minus your pension adjustments or past service pension adjustments plus your pension adjustment reversals and your unused contributions at the end of the previous year.
What is this I hear about RRSP “season”?
During the first couple of months in the new year, you are inundated with advertising from financial institutions urging contributions to your RRSP. The banks will also generously offer you an RRSP loan so that you can make that contribution if you don’t have the funds available during the season in question.
If you can, ignore the supposed seasonality of RRSPs and avoid borrowing to contribute to your RRSP. Instead, set up automated contributions into your RRSP throughout the year. This may need to be adjusted periodically if your income tends to vary and you are at or near your contribution limit.
In another post, I will discuss withdrawing from your RRSP.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.