Registered Retirement Savings Plans
A Registered Retirement Savings Plan is, as the name suggests, a plan that is registered with the Canada Revenue Agency (formerly known as the Canada Customs and Revenue Agency or Revenue Canada before that) to allow Canadians to save for retirement. They are greatly misunderstood and can be better explained through a simplistic comparison .
What exactly is an RRSP?
A Registered Retirement Savings Plan is, as the name suggests, a plan that is registered with the Canada Revenue Agency (formerly known as the Canada Customs and Revenue Agency or Revenue Canada before that) to allow Canadians to save for retirement. They are greatly misunderstood and can be better explained through a simplistic comparison .
The RRSP is really nothing more than a special kind of box. It's designed to hold tax-deductible
investments in a registered account so they can build tax-free until they're withdrawn. You can have as many RRSPs as you want, although it's better to have fewer for ease of management and to minimize any fees.
Since contributions are tax-deductible, they'll be more valuable to those with higher incomes. For example if your income was $50,000 and you contributed $5,000 to an RRSP, your taxes would be based as if your earnings were only $45,000. Since your employer is obligated to remit taxes on your behalf at the $50,000 earnings level (with some exceptions including company sponsored RRSPs reducing the remittance) this will typically result in a tax rebate from the government when you file your tax
return. The higher your income and therefore tax rate the higher your rebate.
Once in a plan your assets grow tax sheltered and therefore will grow much more quickly. For example if you invested money into an RRSP and an equal amount outside an RRSP in an interest paying investment your RRSP would double in almost half the time if you were in the top marginal tax bracket.
We can help you invest in a wide variety of RRSP options including both Guaranteed and variable products.
If you don't have cash to make a contribution, we can arrange an RRSP loan.
We always advise people to automatically pay yourself first. In other words, it's easier to put $200 a month into an RRSP than to come up with $2,400 once a year. Monthly saving also allows you to dollar-cost-average your purchases – the same $200 will buy more units of an investment fund when unit prices are low, and fewer units when prices are high.
You can continue to contribute to an RRSP until the end of the year in which you turn 71, provided you still have earned income. At that time, you must begin to withdraw your RRSP in the form of an income. There are various choices for this and we’d be happy to help you determine which is the most appropriate for you.
As to what you should invest in, consult one of our financial advisers. If you don't have a company pension plan, you may want to be more conservative. If you're not far from retirement, you may also want to be more conservative. The choice is yours. Be sure you know what your risk tolerance is.
What's the deadline?
There is none. All right, that's a bit of a trick question. You can make a contribution at any time. The only RRSP deadline you face is if you want the tax break applied to your
previous years income. In that case, the deadline is midnight, 60 days after the end of the year. But you can always carry forward unused RRSP contribution room to next year, or the year after that, and so on.
The thing about an annual carry-forward, of course, is that they can quickly mushroom into a mountain of room that will stay unused unless you win a lottery or get an inheritance. If you can't muster $2,000 this year, will you be able to find $4,000 next year, or $6,000 the year after that? You can always borrow.
How much can I contribute?
For the 2007 tax year, people can contribute up to 18 per cent of their earned income from the previous year, up to a maximum of
$19,000
But the contribution calculation isn't that simple. From that figure, you must subtract your pension adjustment (PA). If you're a member of a pension plan at work, you'll have a pension adjustment. This amount takes into account the money you and/or your company contributed to an employer-sponsored pension plan. Your T4 slip records the pension adjustment figure.
To this figure, you must then add the total carry-forward of unused RRSP contribution room since 1991. For some taxpayers who haven't been stuffing their RRSPs, this can amount to more than $100,000.
There's an easy way to arrive at this figure without doing all the calculations. Just check the Notice of Assessment you got from the Canada Revenue Agency last year. Or you can phone the tax department's T.I.P.S. line at 1-800-267-6999.
You will be asked to provide your social insurance number, your month and year of birth, and the total income you reported on line 150 of your
most recently processed return.
As of the end of 2006, Canadians had used only eight per cent of their available RRSP contribution room. Put another way, if we all decided to use up all that contribution room, all at once (more than $330 billion), there's no way
our Finance Minister could bring in a balanced budget.
And while there seems to be enormous pressure for everyone to contribute to RRSPs, there may well be a better use for your money. For those with a lot of high-interest credit card debt, it may be better to pay that off first.
