An RRSP, or registered retirement savings plan, is a great way to save for your retirement. It is essentially a savings account with a difference. It allows you to potentially save on taxes as contributions to an RRSP can be deducted from your current taxable income. And you don’t have to pay tax on the funds until they’re withdrawn from the plan.
Individual and group RRSPs
A retirement savings plan can be opened for an individual, a spouse or a group. While you can choose to contribute to both your own RRSP and a spousal RRSP, the total amount must not exceed your RRSP contribution room.
Group RRSPs may be offered by employers. You can contribute to your employer’s group RRSP through salary deductions.
When a spouse withdraws money from a spousal RRSP, the money is taxable in the hands of the spouse, so long as the funds have remained in the plan for at least two calendar years after the year in which the money was deposited. If not, it is the contributor who is liable to pay taxes at the time of withdrawal. As RRSPs are governed by several such terms and conditions, it’s wise to learn more about how a Canadian RRSP works so you can derive maximum benefit from the program. Do some research online and talk to an experienced professional advisor for guidance on the savings plan best suited for your family needs and lifestyle.
Tax on investment income
The funds in your RRSP can be invested in a number of different products, including mutual funds, segregated funds, bonds, equities and guaranteed investment certificates (GICs).
One of the greatest advantages of an RRSP is that you need not pay any taxes on earnings made on investments (capital gains, interest or dividends) held in the plan till the time you decide to withdraw the funds. And when you do withdraw your RRSP savings, the tax charged is calculated based on your applicable tax rate at the time of withdrawal. This will most likely be lower than your present tax rate if you wait until retirement to take the money out. Note also that when you take money out of an RRSP, you don’t get that contribution room back.
An RRSP is therefore a great tool to use to save for the future as it offers tax benefits on investment-related income. You can also take advantage of the tax savings on contributions to pay off non-tax-deductible debt.
Opening an RRSP
An RRSP is easy to set up. You can open an RRSP with a financial institution and make annual tax-deductible contributions for each calendar year up until 60 days after year-end (for 2017, it was March 1, 2018). According to the CRA (Canada Revenue Agency) guidelines, you can contribute to an RRSP if you have filed a tax return, have a social insurance number and have not exhausted your contribution room.
You can find out your annual contribution limit after filing your tax return with the CRA, which will send you a Notice of Assessment that shows your contribution room for the upcoming year. Unused contribution room is carried forward automatically and may be used to help defer taxes in future calendar years.
This post contains sponsored links from Sun Life Financial.