‘Tis the season…for RRSP contributions! I’m sure you all have heard of an RRSP (Registered Retirement Savings Plan) before, but a lot of my clients don’t know all of the details or exactly how they work. Here are 5 important notes about RRSPs, so you can decide if this is a good retirement savings tool for you.
- Your RRSP contribution limit is the lower of 18% of your earned income the previous year or the maximum annual RRSP contribution limit. The maximum limit for 2017 is $26,010. Note that the 18% is of your earned income, not total income. This includes income like employment salary, self-employed income, rental income, taxable alimony received, and does not include things like investment income, pension income, and death benefits received. Unused contribution room carries forward to the next year and accumulates until the end of the year you turn 71. You can find your total RRSP contribution room on your Notice of Assessment.
- The registered nature of an RRSP means that there are tax advantages when you save. Pay attention to your marginal tax rate to calculate what your tax deduction will be when you contribute. Your taxable income will be reduced by the amount of your RRSP contribution, therefore reducing the taxes you’ll have to pay this year and giving you a tax saving almost immediately.
- You can use your RRSP savings to help with your first time home purchase or yours or your spouse’s education costs. Through the Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP), you can withdraw up to $25,000 to put towards the down payment on your first home or a total of $20,000 (up to $10,000/year) towards education costs, without having to pay taxes on the withdrawals. Note that there are specific eligibility requirements that you must meet before you can withdraw under these plans. You must repay the amounts that you withdraw under these plans, and there are specific rules for the amount you have to repay each year and for when the repayments have to start and be completed by.
- The money you invest in your RRSP grows on a tax-deferred basis. This means that you don’t pay tax on the money you earn within your RRSP until you actually withdraw from it.
- You can contribute to your RRSP until the end of the year you turn 71, given you have the contribution room. After that, you must convert your RRSP into a RRIF or an annuity, and start withdrawing from it. There are minimum withdrawal amounts that you have to follow, although there is no maximum amount.
As you can see, there are many benefits to saving with an RRSP, but there are also some important factors to consider. Keep an eye out for my next post so you can make sure you get the full picture. So guys, if you plan on taking advantage of any of the benefits that an RRSP offers, keep in mind that the deadline to contribute for the 2017 tax year is March 1, 2018. Happy saving!