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Your Guide to Understanding Registered Plans: RRSPs

Whether you are buying your first home or considering your retirement investment choices, there are registered plans and services that can help you save for your goals on a tax assisted basis. Most registered plans are designed to help you save for retirement and manage your income stream in retirement.

This guide provides an overview of the benefits of registered retirement savings plans (RRSPs) and how they fit into your financial situation.

A Registered Retirement Savings Plan (RRSP) is a tax-deferred plan designed to help you save for retirement. With an RRSP, your contribution is tax deductible and once in the plan, continues to grow on a tax-deferred basis until the funds are withdrawn. Any funds withdrawn from your RRSP are taxed in the year of the withdrawal. At retirement, the funds may be rolled into any of the RRSP maturity options where they continue to be tax sheltered, except that the amount of money you take out each year is taxable.

Your annual RRSP deduction limit is based on a formula that takes into account your earned income, any unused RRSP deduction room and any pension adjustments or past service pension adjustments. You can find your RRSP deduction limit on your annual Notice of Assessment from CRA.

If you do not take full advantage of the RRSP deduction room available to you this year, the unused contribution room is carried forward for use in a future year. For example, you have $15,000 of RRSP contribution room but can’t make a full contribution this year; the carry forward rules allow you to carry part or all of the $15,000 contribution room forward for use in a later year. The RRSP deduction limit indicated on your annual Notice of Assessment will already factor in any unused RRSP room from previous years.

RRSP Withdrawals

While the funds in an RRSP are designed to provide you with a lifetime retirement income, CRA does allow withdrawals from your RRSP at any time. However, when money is withdrawn from your RRSP, it is considered part of your taxable income for that year and the trustee of your plan is required to withhold tax and remit it to CRA on your behalf. When you prepare your annual tax return, the tax withheld is reported as tax already paid. It is also important to note that the contribution room used is lost forever when withdrawn.

An exception to the rule is provided for withdrawals made under federal government programs like the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). These programs allow you to withdraw tax-free from your RRSP under specific conditions to help purchase a home or help finance education. The funds borrowed under these plans must be repaid to your RRSP over time. While the HBP and LLP initially look attractive because no interest is paid on the funds withdrawn from your RRSP, the loan does have its implications. The considerable cost to your RRSP is the potential growth of the loan amount and the compound income it would have earned over time in your RRSP. The younger you are, the greater the potential loss to your RRSP. In addition, if you do not make a scheduled repayment in a given year, the amount is added to your income for that year.

Spousal Plans

A Spousal RRSP is the same as a regular RRSP except that a Spousal RRSP is registered in your spouse’s name while you, as the contributing spouse, can claim a tax deduction for the contributions you make to the spousal plan. When withdrawals are made, they will be taxed in the hands of your spouse (the plan holder), not you (the contributing spouse) as long as no contributions were made to any Spousal RRSP in the year of withdrawal or either of the two preceding years. You should consider a Spousal RRSP if there will be a large discrepancy between your retirement income and that of your spouse. Your RRSP contribution can be made to a Spousal RRSP, your personal RRSP or split between the two plans.

Planning tips and considerations:

  • Many people delay building their retirement assets until 10 or 15 years before they plan to retire because of other financial commitments. However, because of the tremendous impact that compound growth has on the value of your RRSP, start your plan as early as possible to allow your savings to compound for the longest period of time possible. Consider establishing pre-authorized payments to your RRSP as a disciplined savings tool.
  • Consider making RRSP contributions after you turn 71. As long as you still have RRSP contribution room and your spouse is under the age of 71, you can make tax deductible contributions to a Spousal RRSP in your spouse’s name.
  • If you turned 71 and have earned income which generated RRSP contribution room in the current year, consider making next year’s RRSP contribution in December of this year, prior to converting your RRSP into a RRIF. The one percent penalty tax will apply for December; however the tax savings should exceed the penalty tax.