Everyone’s heard of RRSPs, but many of us have a secret: We have no idea what they are. Well not to worry, we’re here to help. Below are some of the most common questions, and their answers, about Registered Retirement Savings Plans (RRSPs).
An RRSP is a government approved plan that is primarily used to save money for retirement. Your contributions, within limits, are tax deductible. You don’t pay tax on the income earned while the funds are in the plan, but they are taxable when they are withdrawn from the plan.
How do I set up an RRSP?
Talk to your financial institution. They can help you assess your financial goals, determine your comfort with risk and recommend investment options. They can also help you set up a monthly savings plan.
Who is eligible to contribute to an RRSP?
Anyone with “earned income” taxable in Canada may contribute to an RRSP. This includes non-residents.
When can I contribute?
File a tax return at an early age to report your earned income and create RRSP deduction room. Then begin making contributions. You can contribute in a lump sum or make regular contributions throughout the year.
How much can I contribute each year?
Generally, the amount you can contribute for a given tax year is determined by your RRSP deduction limit. Deduction limits are calculated each year. The following items are considered:
- Previous year earned income
- Pension adjustments
- Past service pension adjustments
- Pension adjustment reversals
- Your unused RRSP deduction room can be carried forward to the next year.
You may contribute any time during the year. Contributions made during the first 60 days of any year may be deducted for the current or the immediately preceding taxation year.
You may also make part or all of any contribution to a plan in your spouse’s or common-law partner’s name. You, as the contributor, are still entitled to the tax deduction.
What types of RRSPs are available?
There are three basic types of individual plans available.
- Deposit plans offer savings options such as saving accounts, term deposits or guaranteed investment certificates (GICs). These plans may be covered by deposit insurance.
- There are many types of mutual funds* available. Since mutual funds fluctuate in value, they don’t provide a guaranteed rate of return. Mutual funds are not covered by deposit insurance.
- With self-directed plans you make your own investment decisions within a range of qualified investments. A trustee does all the administration work for you.
Can I withdraw funds from my RRSP?
Yes, but there may be restrictions about how or when the funds may be withdrawn. For example if you have your RRSP funds in a term deposit, you may not access those funds until the term has ended. Generally the money you withdrawal is taxable.
Funds may also be withdrawn, without taxation, under the Home Buyers’ Plan or the Lifelong Learning Plan.
Remember that locked-in RRSPs have withdrawal restrictions.
What is the Home Buyers’ Plan?
The Home Buyers’ Plan allows you to withdraw up to $25,000 from your RRSPs to use as a down payment to buy or build a home. The loan is not considered income and will not be taxed as long as you put the money back into your RRSP within 15 years (minimum annual payments required). To qualify you must be a first-time home buyer or the home must be for a person with a disability (yourself or a relative). More information is available on the Government of Canada website.
What is the Lifelong Learning Plan?
The Lifelong Learning Plan allows you to withdraw amounts from RRSPs, under specific conditions, to finance training or education for you or your spouse or common-law partner. The loan is not considered income and will not be taxed as long as you put the money back into your RRSP within 10 years (minimum annual payments required). More information is available on the Government of Canada website.
Can you borrow to invest in an RRSP?
Yes, but you can’t deduct interest on money you borrow to contribute to an RRSP.
How safe are RRSP investments?
Different types of investments have different levels of risk and return. Before you invest in any RRSP, ask about deposit insurance protection. There is no insurance on mutual funds*, nor on most investments commonly held in self-directed RRSPs.
Can you leave funds in an RRSP indefinitely?
No, you must either purchase a retirement income option or withdraw your funds before the end of the calendar year in which you turn 71.
If you withdraw the funds, the money is taxable. You may choose to transfer the funds directly to a registered retirement income fund (RRIF) or an eligible annuity. Note that taxes will continue to be deferred until you receive payments from the RRIF.
Sources: Canada Revenue Agency ; Understanding the Basics
*Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all my be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.