RRSP stands for “Registered Retirement Savings Plan”. This is an account registered with the federal government that is used to save funds that will go towards retirement.  Many people think since this is called a Savings plan it must be in a savings account. However, there are many types of investments that may be held in a variety of financial institutions. 

Investments that can be held in an RRSP are called qualified investments. Examples are: 

  • Cash
  • GICs
  • Savings bonds
  • Treasury bills (T-bills)
  • Bonds (including government bonds, corporate bonds and strip bonds) 
  • Mutual funds 
  • Equities (both Canadian and foreign stocks) 
  • Segregated Funds (Insurance backed) 
  • Canadian mortgages 
  • Mortgage-backed Securities
  • Income trusts 
  • ETFs 

Benefits of Using an RRSP

With so many options, there can be no doubt that there are some significant advantages to securing your current and future financial goals through an RRSP. Many of these benefits relate to taxes and should not be ignored. Here is a list of our top 3 advantages of using an RRSP:  

1)  Tax deductible contributions – You get immediate savings on taxes by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars. 

2)  Tax-sheltered earnings - The money you make on your RRSP investments is not taxed while it stays in the plan. Your investment may grow quicker because it isn’t being chipped away by taxes. 

3) Tax deferral – Many people tell you how to invest and how to use this advantage. However, RRSPs don’t save you from taxes forever. Once you start withdrawing the money in your account, you will also start being taxed. You’ll pay tax on your RRSP investment when you withdraw funds from the plan. That includes both your investment earnings and your contributions. 

To best understand how much and when you would be taxed should you withdraw from this account, talk to your Kardia Financial Advisor.  


Pensions vs RRSPs 

When creating a retirement plan, the easy assumption is that a pension will fund your elderly years. Unfortunately, employers do not offer pensions to the same extent as they once did, requiring people to look to a different way to plan for retirement. RRSP accounts are one of the most easily accessible ways to plan for retirement, although there are many other investment strategies out there that should also be considered. 


Contribution and Withdrawal Limits 

Similar to other accounts like TFSAs, there are conditions and limits as to when and how much you can change the balance of your RRSP account. These are called Contribution (or Deduction) limits. RRSP contribution limits are measured based on your annual income. They are also called deduction limits because they limit the amount of income that are eligible for tax deductions in your RRSP account. You can put up to 18% of your income, up to a certain amount, into your account.  

Recent contribution/deduction limits are as follows:  

2020: 18% of your annual income OR $27,230 (whichever is lower) 

2019: 18% of your annual income OR $26,500 (whichever is lower) 

2018: 18% of your annual income OR $26,230 (whichever is lower) 

You can contribute to your RRSP account until December 31 of the year that you turn 71. 

There isn’t a dollar value that you are limited to when withdrawing money from your RRSP, even if you are not yet retired. However, early withdrawals are sometimes necessary, but they do come at a cost. In addition to being steeply taxed on the money you take out; you actually lose the contribution room you used when you put in that money. This means that at the end of the day, the amount you can save for your retirement decreases.  

You do need to think twice before withdrawing money from this account, but there are options for certain scenarios that may help. If you are buying or building a home, both you and your spouse can borrow money from your RRSP without a tax penalty, as long as it is paid back within 15 years. This is done through the Canadian Government’s Home Buyers’ Plan. Or, if you or your spouse is looking to go back to school, the Lifelong Learning Plan also has exceptions to taxes on withdrawals subject to certain repayment requirements.  


The 2020 RRSP Deadline

The deadline for this year’s tax contribution is March 2, 2020. Contributions made in the first 60 days of the new year can be applied against the previous taxation year or any subsequent year. 

 

Speak to a Kardia Financial Advisor to help you feel confident that you have explored all your options and you have a retirement plan that fits you and your goals.  

 

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