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RRSP and What You Need to Know

RRSP - Registered Retirement Saving Plan

So, What is an RRSP?

A RRSP is a retirement savings plan that is registered by the Canadian government, is established by you, and the contributions are made by you or your spouse/common-law partner. Contributions to a RRSP are deductible from your income, leading to a return of any taxes overpaid during the year through payroll deductions or otherwise.

We accumulate retirement savings in a RRSP. The tax deductible contributions grow inside the account tax free, and at retirement the RRSP is converted to a Registered Retirement Income Fund (RRIF) which is designed to de-accumulate the funds as a retirement income. Income payments from a RRIF are included in taxable income. The effect of deducting contributions in the higher taxation years of employment, and withdrawing the funds in the lower taxation years of retirement, is where the RRSP/RRIF model gets its magic.

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Who Can Contribute to an RRSP?

Any Canadian with T4 employment income can contribute to RRSPs, there is no minimum age. Minors with contribution room who wish to open a RRSP can get a letter of consent from a parent, who would simply retain the signing authority on the account until the minor reached the age of majority. You can contribute to your RRSP until December 31st of the year you turn 71 years of age provided your RRSP still has contribution room available. However, it is possible for you to contribute to your common-law partner’s or your spouse’s RRSP until December 31st of the year that he or she turns 71 years of age.

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Deduction Limit Room and How It is Determined

Deduction limit is also known by the name “contribution room” which is the amount that you can contribute to your RRSP, your spouse’s or your common-law partner’s RRSP, and the maximum amount of taxable income that could be deducted to reduce your tax for that year. However, your RRSP’s deduction limit might exclude particular types of qualifying income transferred to your RRSPs.

RRSP deduction limit could be found under:

  • the “Available contribution room” amount found on the RRSP/PRPP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment

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According to the Canada Revenue Agency, the RRSP deduction limit is calculated as:

RRSP Deduction Limit Calculation

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Guide T4040, RRSPs and Other Registered Plans for Retirement will show you how to calculate your RRSP deduction limit step by step.

If you contribute more than the deduction limit by more than $2,000 to your or your spouse’s or common-law partner’s RRSPs, a 1% tax will be charged monthly on the excess contributions unless you withdraw the excess amount. Canada Revenue Agency provides a guideline for when you have exceeded your RRSP deduction limit.

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Source:
Registered Retirement Savings Plan (RRSP). (n.d.). Retrieved from http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/rrsps-eng.html
Terms of Use – Leisure Travel Vans. (n.d.). Retrieved from https://leisurevans.com/terms/
Compare an RRSP with the Fonds with the TFSA – Fonds de … (n.d.). Retrieved from http://www.fondsftq.com/en/reer/pourquoi-choisir-le-fonds/reer-du-fonds-vs-celi.
Where can you find your RRSP/PRPP deduction limit? (n.d.). Retrieved from http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html
How contributions affect your RRSP/PRPP deduction limit (n.d.). Retrieved from http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/cntrbtng-eng.html

 

5 Comments

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