What is an RRSP?
Registered Retirement Savings Plans (RRSPs) are usually one of the first methods (besides perhaps pensions) that come to Canadians’ minds when they think of saving for retirement. These plans allow you to make tax-deductible contributions (up to a specific limit based on your income) to help grow the value of your savings without being taxed on the growth and then withdraw (with applicable tax) the principle and earnings from the plan. With the help of a financial planner, you can structure contributions and withdrawals so that contributions are made in higher-taxed income years, and withdrawals take place during lower income years (most often, the retirement years).
One of the most basic and important rules of RRSPs is the contribution limit. This limit is calculated by the Canada Revenue Agency each year and is carried forward indefinitely from one year to the next. Your contribution limit is based on 18% of the previous year’s earned income, less any pension or other adjustments, up to a limit of $27,830 (for the 2021 tax year). The CRA will allow an excess contribution of $2,000 without penalty for those 19 years of age or older, but if you contribute more than $2,000 over your limit, you will be subject to a penalty tax.
If you happen to have a lower-income-than-normal year or have other credits that have already lowered or eliminated your tax bill, you can carry forward your RRSP contribution to a future year. However, remember that your contributions reported on your RRSP receipt still have to be reported on your tax return for that year.
Spousal RRSPs are also available, where one spouse (usually the higher income earner, the “contributor”) builds RRSP contribution room and then makes the contribution into a Spousal RRSP in their spouse’s name (“the annuitant”). This way, the RRSP can be withdrawn from and be taxable to the lower-income earner, the annuitant, saving on your joint tax bill. However, there is an exception: funds withdrawn within three years of the contribution are taxable to the contributor, not the annuitant of the plan. The Spousal RRSP is entirely owned and controlled by the spouse in whose name the plan is held.
You can make a taxable withdrawal from your RRSP at any time. Tax is withheld at source by the plan administrator (Quadrus, for example) and reported to the CRA toward your total taxes and income. There are programs in place by the CRA that would allow you to withdraw from your RRSP without tax, pay for post-secondary education for yourself or a spouse (the Lifelong Learning Plan), or buy a house for the first time (First-Time Home Buyers Plan). Unless otherwise requested, the applicable tax rate (in provinces other than Québec) is:
- 10% on withdrawals up to $5,000
- 20% on withdrawals between $5,000.01 to $15,000
- 30% on withdrawals $15,000.01 and up
RRSPs certainly have many tax advantages, all while helping you create a nest egg to support yourself during your retirement years. Talk to one of your advisors today about your options to save.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.
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