Registered Savings Plans / RRSPs - Registered Retirement Savings Plans
RRSPs - Registered Retirement Savings Plans
For most Canadians an RRSP is the best way to save for retirement. Most fundamentally, the growth on investments inside an RRSP is tax-deferred, meaning you don’t immediately pay tax. Any interest, capital gains or dividends earned will compound tax-deferred. Money is only taxed – as income – when you remove it from the plan. In addition, you get a deduction from the annual taxable income you earn for every dollar you contribute to your RRSP.
RRSPs are the single most significant financial opportunity available to Canadians today and investors recognize them as the best way to save for retirement. Public pension plans – Old Age Security and Canada Pension Plan – together provide an average of $11,244 and a maximum of $17,414 to individuals aged 65 and older. Unless you participate in an extremely generous plan, a corporate pension plan alone cannot meet your income needs throughout retirement.
Key benefits of an RRSP- Investments compound tax-deferred as long as they remain in the plan
- Choose your investments from a wide range of options
- Contributions are tax-deductible
Spousal RRSPs
Spousal RRSPs have traditionally been used as an income-splitting strategy for retirement. You can contribute to your spouse’s RRSP but claim the deduction yourself. Your total contributions (to your own and your spouse’s plans) are subject to your normal contribution limits. In retirement, withdrawals are taxed in your spouse’s hands rather than yours, as long as the contribution has remained in the plan for at least three years. So you benefit from their lower tax rate in retirement, while reducing your own tax during your working years.
In October 2007, the government introduced new pension splitting rules that now allow Canadians 65 or older to split pension income with their spouse. Is there still a place for spousal RRSPs?
Here are situations where the spousal RRSP is still useful:- If you are planning to retire before age 65(pension splitting rules are for those 65 and older)
- If you are saving for a home (each person can withdraw $25,000 under the Home Buyer’s Plan)
- If you’re 71 or older and can no longer contribute to your own RRSP, you can still contribute to your spouse’s RRSP if you have earned income
- If you and your spouse want to make the balance of assets in your household more equal
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Tips
The deadline falls 60 days after the end of the year. If that day falls on a weekend, the CRA may extend the deadline to Monday.
You can contribute up to 18% of your earned income to a maximum of $22,000 in the 2010 tax year (minus pension adjustments from your company pension plan). For 2011 and beyond, the annual contribution will be indexed based on the average wage growth.
Your Notice of Assessment from the CRA will state your maximum contribution for the current year. If you need to double check,
call the CRA at 1-800-959-8281 English or 1-800-959-7383 French.
Earned income includes salaries, self-employment income, maintenance and alimony payments, and net rental income. It does not include income from pensions or investments.
If you don’t contribute the maximum amount that you’re allowed, you can carry forward the unused portion indefinitely. Your Notice of Assessment will show your unused RRSP contribution room.
Over-contributions are subject to penalty fees. The over-contribution limit is $2,000, which is carried forward over your lifetime. If you exceed the limit, you will be assessed a 1% per month tax penalty.
You can hold mutual funds, equities, bonds, cash and a variety of other investments in your registered plan. You are no longer restricted in the amount of foreign investments in your portfolio.
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