Here is what you need to know about RRSPs ahead of the March 1 contribution deadline.
Chances are you’re looking to retire at some point. But retirement comes with a hefty price tag. Consensus on the subject is that even the average person will need as much as seven figures in savings to retire comfortably. So where do you find this kind of money? The Canadian government has an excellent option for you: a Registered Retirement Savings Plan, more commonly known as an RRSP.
Since being introduced in 1957, RRSPs have become one of the most popular retirement savings tools, with over two-thirds of Canadians having one according to a recent study conducted by BMO. An RRSP is not simply the preferred option among Canadians for building a nest egg, and a critical part of any successful long-term financial plan. Perhaps what makes it even more appealing is that it can mean the difference between just getting by and having the finances to live out your dreams once you leave the workforce indefinitely.
This FAQ-style guide to the RRSP covers the basics of the account, and goes over how you can use an RRSP just in time for the March 1 contribution deadline.
A common misconception is that an RRSP is an investment product, like a stock or a bond. Instead, an RRSP is a long-term savings account registered with the federal government and offered through the Canada Revenue Agency (CRA). You can contribute to your RRSP on an annual basis and benefit from its special tax advantages, building your retirement savings this way. So long as you’ve earned income last year, have a social insurance number, and have previously filed a tax return – in other words, you’re a Canadian taxpayer – you are eligible to open and contribute to an RRSP.
All investments in your RRSP account are exempt from taxes, which makes RRSPs especially attractive for retirement savers. You will end up paying taxes, however, when you make a withdrawal from your RRSP, which would then be taxable as income. In the meantime, your money, and investments in your RRSP are not taxable.
Canadian taxes are notoriously high, and can cut into your income stream significantly, making it difficult to save for the long-term. In addition to this, we all have some other financial goals we would like to achieve before retirement, which can further complicate your savings situation. When you save in an RRSP, however, your money enjoys special tax benefits:
You can hold a variety of investments in your RRSP. Eligible investments include:
It is important to treat your investments in your RRSP with the same attention and care you would give to your regular portfolio. You should speak with an advisor to determine what investments are right for you depending on your retirement goals, spending habits, and desired retirement age.
Every year you can deposit up to 18% of your previous year’s pre-tax earned income in your RRSP, or the pre-determined contribution limit, whichever is less. This total amount is known as the contribution room. Depending on your earned income and how much you have contributed the previous year, your exact contribution room will vary from year to year.
The maximum contribution limit for 2020 is $27,230. The maximum contribution limit for 2021 is $27,830. You cannot contribute more than these limits for those respective years, regardless of whether your calculated available contribution room exceeds this limit. However, you may have unused contribution room left over from a previous year. If you do not use your full contribution room for that year, you can carry the remaining contribution room over to the next year.
Example – Calculating your total contribution room as an RRSP account holder: You earned $55,000 in 2019 and $55,000 in 2020. Your contribution limit is $9,900 for 2020. In 2019, you contributed $5,000 to your RRSP, which means you have $4,900 in contribution room you can carry over to 2020. In 2020, you will have a total contribution room of $14,800 ($9,900 – $5,000 + $9,900 = $14,800). In other words, your 2020 contribution room is $9,900, and you have an additional contribution room of $4,900 on last year that you can carry over to 2020, for a total contribution limit of $14,800 for 2020.
Example – Calculating your total available contribution room if you’ve never made an RRSP contribution before: You have been earning a consistent yearly income of $50,000 yearly for the last 5 years and have been paying taxes on this income, but you have not contributed to an RRSP yet. This year you decide to open an RRSP and contribute. Your total available contribution limit is $45,000 ($50,000 x 18% = $9,000 x 5 = $45,000).
It all depends on your individual situation. Therefore, it’s important to consult a Wealth Management Advisor, who can help you make the right decision. Our trusted Wealth Management Advisors at Rothenberg can evaluate your situation to help you get a better idea or second opinion on what investments might be appropriate for you. You can email us at inforequest@rothenberg.ca, send us a message, or call us (Montreal: 514-934-0586 or Calgary: 403-228-237).
You can check your available contribution room on my CRA account. This is especially helpful in the case your earned income changes from year to year and you’re unsure how much contribution room you’ve accumulated.
You will have to pay penalties of 1% per month on any contributions that exceed your annual contribution limit by more than $2,000. You can read more about this here.
Contributions to an RRSP can be made until December 31st of the year you turn 71. By the end of the year in which you turn 71, you must transfer all the money out of your RRSP and close your account. You can do this in any of the following ways:
Before you retire, you may find yourself needing some money you put away in your RRSP, such as for buying a house. In some cases, tax-deferred withdrawals can be made from your RRSP. However, aside from the permitted scenarios, if you decide to withdraw money early, you must pay withholding tax. The withholding tax rates for everywhere outside of Quebec are the following:
The withholding tax rates for Quebec are:
You must also include the withdrawal in your taxable income for the year. You should note that this contribution room is lost forever.
The following are two cases where you can withdraw money from your RRSP without a tax penalty:
You will be required to pay back the withdrawal into your RRSP within the applicable timelines.
The main difference is that a group RRSP is administered by an employer as part of a group benefits package. In cases where your employer offers this option, you are not obligated to participate. Your employer will deduct amounts directly from your paycheck and invest it for you. In some cases, they may even offer to match that amount. This is their way of saying, thank you for all your hard work. When you cease employment, you can transfer your RRSP to another institution, such as Rothenberg Capital Management, where we offer and handle RRSPs.
Lucky for you, we’ve written a whole different article on this, “Prioritizing TFSA vs. RRSP,” which we encourage you to read should you want to learn more on this topic.
Interested in saving for retirement? Ready to contribute to your RRSP this year or want to learn more about your investment options? Our Wealth Management Advisors at Rothenberg Capital Management can assist you. You can email us at inforequest@rothenberg.ca, send us a message, or call us (Montreal: 514-934-0586 or Calgary: 403-228-237). To learn more about retirement planning with Rothenberg, click here.
Do you have a question about RRSPs that we didn’t answer? Write to us at inforequest@rothenberg.ca or submit your question here, and we’ll add it to this list. Please don’t hesitate to ask your question(s). We’ll be happy to help.