What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a savings and investment plan that sets aside the funds you'll need after you retire from the workforce and are no longer earning a regular income.
The plan is provided by the federal government and is designed to reduce the amount of taxes you pay during your income-earning years. In addition to your own RRSP, you can also contribute to your spouse or common law partner's plan to help them save for retirement. Anyone who files a tax return can open an RRSP.
How do RRSPs work?
The idea behind RRSPs is that any funds placed within them stay in the plan until you turn 71.
You'll then receive them either as a lump withdrawal or in increments, similar to the paycheque you received when you were working. Any money you put into your RRSP is not taxed until it is removed from the plan.
This includes any money you may earn on investments that are placed within the RRSP. Each year, you can claim the taxes already paid on the amount you have contributed to your RRSPs to be returned to you. This is called an income-tax deduction, and you will receive the money as part of your tax return. The amount you receive back depends on your income level and the amount you have contributed.
However, you don't have to claim your whole contribution each year - you can choose to defer receiving your return to another year if you want to. This is especially helpful if you’re putting money towards retirement at an early age, but don’t make enough to use it as a tax deduction. If you withdraw money from your RRSP at any time (excluding use for the Home Buyers' Plan or LifeLong Learning Plan), the funds will be taxed as part of your income for the year.
How much can I contribute to my RRSP?
The amount you can contribute, also referred to as your deduction limit, depends on how much you earn; generally, you can put as much as 18% of your income from the previous year.
This amount can be found on the Notice of Assessment you received after filing last year's taxes. For example, those who wish to make an RRSP contribution for 2015 must look to the assessment they received after filing their 2014 taxes for the maximum amount they can contribute this year. However, this amount may be lower if you're already participating in a pension plan.
If you do not make the maximum contribution to your RRSP, you are left with extra contribution room which is carried over each year starting in 1991. For example, if you are making your very first contribution this year and have been eligible since 1991, you could contribute the maximum amount available for each of those years combined. Don’t forget: Each time you put money in your RRSP, you'll receive a receipt, which you'll need later when you want to claim a deduction on your income tax return; so don’t forget to ask for them each time you make a contribution.
What types of plans can I choose from?
Although you can only contribute a certain amount of money each year, there’s no limit to how many RRSP accounts you can open. Generally, there are four types of RRSPs you can choose from: Since each account works slightly differently, make sure you ask questions about each before choosing one.
- A basic RRSP
- A group RRSP offered through your work
- A partner or spousal RRSP
- A self-directed RRSP
When can I contribute to my RRSP?
You can make a contribution to your RRSP at any time throughout the year, up until the deadline (generally the first or second day of March). Many procrastinate and make their contribution all at once - in fact, most lenders have extended hours to deal with the rush during RRSP season.
Investments in an RRSP
RRSPs are very versatile, and are considered registered investment accounts - so while you can keep your money in just a savings account within the plan if you wish, you can also put it to work via a number of investments, including: Money earned through interest on those investments can’t be taxed either – at least, not until you take them out of the plan.
- Guaranteed Income Certificates (GICs)
- Bonds
- Mutual funds
- Income trusts
- Corporate shares
- TFSAs
How long can I contribute to my RRSP?
You can begin contributing to your RRSP at the age of 18, up until December 31 of the year you turn 71. At that time, you can either pull all of the funds out at once, turn them into an annuity, or transfer them into a Registered Retirement Income Fund (RRIF), which will pay you in increments. With this option, you can’t put money in anymore, and instead take money out every year – and you guessed it, pay taxes on it. It’s basically your own personal pension.
Can I take money out of my RRSP before I retire?
Yes, as long as your funds are not in locked-in investments (such as a non-redeemable GIC), you can remove the funds from the plan at any time, though you'll be taxed on the amount as annual income.
There are two instances when RRSP funds can be removed without taxation:
1. You can use up to $25,000 of your saved funds to help buy your first home with the Home Buyer's Plan. The money must be paid back to your RRSP within 15 years. If you are buying a home with a partner, and you are both first-time buyers, both of you can access your RRSP funds to a combined maximum of $50,000.
2. You can use up to $10,000 annually and $20,000 total of your saved funds to return to school via the LifeLong Learning Plan. The funds must be paid back within 10 years.
