An RRSP (Registered Retirement Savings Plan) is a retirement savings plan that you establish that the CRA registers. RRSP contributions can be used to reduce your tax. For example, if you are getting close to a new tax bracket you can use your RRSP contribution to reduce your income… and save on taxes because you stayed in the lower tax bracket.
An RRSP is a simple way to save for retirement and pay less income tax. There are other useful things you can do with your RRSP as well, including: the RRSP Home Buyers’ Plan, and the Lifelong learning plan.
Can I use my RRSP as an investment account?
Absolutely! Growth in an RRSP is tax free, so investing this money is a good idea so it can grow for your future. At Bowie Financial we like Segregated Funds to secure and grow your RRSP. You can invest in the market while guaranteeing your principal deposit. When rates are decent, we look at GICs as an option too.
RRSPs and Taxes
Any growth you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally will have to pay tax when you receive payments from the plan, or when you receive income or withdrawal later on. Taxes are deferred until then. For example, if you took $10,000 out of your RRSP in 2021; it would be claimed on your 2021 income tax return as income and you’ll be taxed as such.
How do I get an RRSP started?
An RRSP is set up through a financial institution such as a Financial Brokerage like Bowie Financial, or at a bank, credit union, trust or insurance company. Your financial institution will advise you on the types of RRSP and the investments they can contain. If you’d like to work with us, set up an appointment with an advisor today!
You may want to consider a spousal/common-law partner RRSP
You may want to set up a spousal or common-law partner RRSP. This type of plan can help ensure that retirement income is more evenly split between both of you. The benefit is greatest if a higher-income spouse contributes to an RRSP for a lower-income spouse.The contributor receives the short term benefit of the tax deduction for the contributions and the annuitant, who is likely to be in a lower tax bracket during retirement, receives the income and reports it on their Income tax and Benefits Return. When you convert your RRSP to a RRIF later in life, you can also take advantage of pension income splitting.
How many RRSPs can you have?
There is no limit on the number of RRSPs you can have. The limit is on the total amount you can contribute; and later deduct from your income. However, most people find it simpler to have only one or two plans, making it easier to keep track of their RRSP investments.
Is there a limit to how much I can contribute to my RRSP?
Yes, there is an RRSP contribution limit. The CRA states this about limits:
The total amount you can contribute to your RRSP each year is made up of your contribution limit for the current year plus any “carry-forward” contribution room from previous years. If you don’t make the maximum allowable RRSP contribution in any given year, Canada Revenue Agency (CRA) lets you carry forward the unused contribution room indefinitely and add this to the amount you can contribute for future years.
Your RRSP contribution limit for 2021 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $27,830. For 2020, the dollar limit was $27,230. If you have a company pension plan, your RRSP contribution limit is reduced.
Both your annual contribution limit and any carry-forward contribution room are shown on your Notice of Assessment.
What is the age limit to contribute?
You can contribute to your RRSP up to December 31 of the year you turn 71. You can spread out your final contribution throughout many future tax years to lower your income on tax return line 236 if you and your Tax Advisor see a benefit to doing so. RRSPs must be converted to a registered retirement income fund (RRIF) or an Annuity once you turn 71 to avoid having the value of your RRSP fully taxed in the year. Converting an RRSP really deserves its own blog… (being written now, stay tuned).
