Simplify your retirement savings with this easy guide to RRSPs.
You've probably heard of the Registered Retirement Savings Plan (RRSP). Perhaps you've even set up a monthly RRSP contribution. But beyond the basics, do you really know what an RRSP has to offer?
The federal government introduced the RRSP in 1957 as a way to motivate Canadians to save for retirement. Mission accomplished! Today, the RRSP is a popular retirement savings tool among Canadians and it’s an easy way to begin investing in your financial future.
If you're interested in what makes the RRSP such a useful tool, the different RRSP options that are available and the simple steps you can take to start investing today, then read on.
What makes the RRSP so useful?
The RRSP offers many advantages. Not only does it provide tax deferral, it's also a savvy investment tool. Here are some quick facts about RRSPs and how you can maximize their benefits.
Contributions are tax deductible
When you contribute to an RRSP, you may be able to claim a tax deduction that could decrease your taxable income and your taxes. For example, if you make $50,000 each year and contribute $5,000 to an RRSP, you generally will be taxed that year on only $45,000.
This means that income or growth that build up in your RRSP are not currently taxed, which may help your investments to grow faster than taxable accounts. You generally pay tax only on amounts that you withdraw from your RRSP.
To take full advantage of this program, it's typically a good idea to wait until retirement to begin withdrawing money. After retirement, your income may drop, meaning you could be taxed at lower rates.
Special programs allow you to access RRSP funds without paying tax on the withdrawal
The Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP) allow you to make temporary withdrawals from your RRSP to pay for your first home or certain educational programs. As long as you follow the rules regarding how much you can withdraw and when the money needs to be paid back, you don’t pay tax on amounts withdrawn under these programs.
Three common types of RRSPs
To understand the full potential of your RRSP, you'll want to know the available options. Here's an easy primer on 3 common types.
1. Individual RRSP
The individual RRSP is probably the most popular of the Registered Retirement Savings Plans, or at least the most well-known. Anyone under the age of 71 can open an individual plan.
When you open an individual RRSP, it's registered in your name. You're both the account holder and the contributor.
The individual RRSP offers all of the benefits discussed above. Contributions are tax deductible and taxes are deferred until you withdraw funds from the plan.
How to get started
If you would like to open an RRSP, you can do so at your preferred financial institution. You can open an RRSP that invests in savings accounts and GICs, or if you feel confident managing a broader range of investments on your own, you can open a self-directed RRSP through an investment firm or online brokerage.
Wondering what happens after you turn 71? Well, you can withdraw the funds from your RRSP, transfer funds to a Registered Retired Income Fund (RRIF), use the funds to buy an annuity or some combination of these options. You will pay tax at the time you withdraw funds from your RRSP or RRIF or on the income from an annuity. The CRA explains it all onlineOpens a new window in your browser..
2. Spousal or common-law partner RRSP
With a spousal or common-law partner RRSP, you make contributions to an RRSP that’s owned by your spouse or common-law partner. As the contributor, you can claim a tax deduction for the contributions (if you have sufficient RRSP contribution room) and, in most cases, your spouse or common-law partner will be taxed on any withdrawals made.
The spousal or common-law partner RRSP is especially useful when you expect to have a higher income at the time of your contribution than your spouse or common-law partner will have upon withdrawal. For example, if you have a pension plan and your spouse or common-law partner does not.
You may be able to claim a tax deduction for contributions you make to a spousal or common-law partner RRSP. Your contributions do not impact how much your spouse or common-law partner can contribute to an RRSP.
If you are over age 71, you can no longer make an RRSP contribution to an individual plan, but you can continue to contribute to a spousal or common-law partner RRSP until the end of the year that your spouse or common-law partner turns 71.
How to get started
Your spouse or common-law partner is the owner of the spousal or common-law partner RRSP, and it is up to them to open the account. This can be done in person or on the phone with a bank, or online with a discount brokerage. Keep in mind that they will need some of your personal information including your job details and social insurance number.
3. Group RRSP
A group RRSP is a collection of individual RRSPs that are administered together. The group plan is sponsored by 1 employer and is available to all eligible employees. Each participating employee has an account and both the employer and employee may make contributions. Typically, employees contribute through automatic payroll deductions and the employer may match all or a portion of the employees’ contributions. It’s important to note that any employer contributions will affect the employee’s RRSP contribution room and are taxable to the employee.
Get more when employers match a portion of the employee's contribution. Although your employer’s contribution will be included in your income, you may be able to claim a deduction to reduce your taxes.
Set it and forget it! Automatic payroll deductions make saving incredibly easy.
Immediate tax benefits
Instead of waiting until you file your tax return to claim a tax deduction, the income tax that is withheld from each pay is reduced.
How to get started
Eligible employees have the option to participate in the group RRSP. If the employee chooses to participate, they can determine how much they want to contribute and which portfolio option is best for their particular needs.
Now it’s time to start saving!
It’s easy to get started on your RRSP savings. By contributing to an RRSP, you’re taking a simple and important step that may help to secure your financial future. Take advantage of the tax benefits and your retirement savings could reach great new heights.