We asked our Investment Specialist, Heili Orav, to answer some frequently asked questions about Registered Retirement Savings Plans (RRSPs).
1. What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a program set up by the government to assist Canadians save for their retirement, it is best used to supplement inadequate or replace non-existent workplace pensions. The program is a tax deferral program, meaning contributions made towards your retirement now can reduce your current income plus it has the benefit of growing tax sheltered. Eventually these funds will be taxed when withdrawn in the future, ideally when the annuitant (holder and beneficiary of the RRSP) is in a lower tax bracket. This program is only available to resident Canadians who have previously filed taxes and are 71 years old or younger.
2. When is the contribution deadline?
The RRSP deadline is always the first 60 days of the year to apply against a previous year’s income taxes. In 2019 that deadline is March 1st for contributions against 2018 taxes.
3. How much can I contribute to my RRSP?
Everyone’s contribution limit is different: it depends on your earned income and any previously unused contribution room. Limits are based on 18% of your earned income (after pension allowances if applicable) up to a maximum of $26,230 for the 2018 tax year. If you are uncertain about your contribution limit, it is best to refer to your previous year’s notice of assessment, check MyAccount on CRA’s website, contact CRA directly or speak with a tax specialist.
4. What kind of investments can I hold in my RRSP?
There are several eligible investment options to hold within your RRSP, including Cash, stocks, bonds, mutual funds, mortgages, gold and silver bullions, small corporation shares, & annuity contracts. Cash and Guaranteed Investment Certificates (GICs) are available at ECU; stocks bonds and mutual funds are available to ECU members through partnerships with Credential Asset Management and Qtrade Investor.
5. Will I ever have to pay taxes on the money in my RRSP?
As mentioned above, RRSPs are tax deferral plans. When the funds are eventually withdrawn from the plan, the income is then taxed at your current tax rate.
6. What happens to my RRSP when I retire?
You have several options regarding your RRSP when you retire and this depends on your specific household needs for income. When the need to begin to draw from the assets begins, one can withdraw all the assets at once and be taxed on the entire amount (sometimes, though seldom the best course of action), the funds can be converted to a Registered Retirement Income Fund (RRIF), you can buy an annuity or select a combination of any or all of the above.
The year you turn 71, an RRSP is deemed to have matured and must be collapsed, whether that was when you retired or not.
7. Can I take money out of my RRSP without a penalty?
RRSPs were designed to encourage retirement savings; use of those funds for other purposes are not recommended. Assets that are withdrawn from an RRSP will incur a withholding tax of anywhere between 10-30% that is remitted to CRA at the time of your withdrawal. This “penalty” is a “pre-payment” of your potentially outstanding taxes. There are two exemptions to this rule, and that is to “borrow” from your RRSP to help pay for buying a home or for continuing education. Inquire for more details if this may apply to you.
8. I’m in my mid-twenties, which should I use more, an RRSP or a TFSA?
As with all investment decisions, this is a question that depends very much on your personal situation, your goals and dreams, your resources, and your level of income and type of work benefits. In an ideal world, you would maximize both contribution rooms (and still have some extra left over for a fun trip!) Two very general areas to consider when starting your decision making process include your income and your general goals. Do you have a company pension? Do you live in Ontario and earn less than approximately $42,000? If so, then you may want to look at a TFSA. When an RRSP contribution will bring you into a lower tax bracket is when you will get the biggest benefit. The other thing to consider is your goals, especially in the next 1-3 years. Do you plan to travel? Or do you plan to buy a car or a house? These too will influence where you would be best to invest your money, since money in a TFSA is more accessible than that in an RRSP. Contact us to learn more about which investment strategy will best suit you.