Are you ready to take control of your financial future and build a robust retirement plan? Look no further than the Registered Retirement Savings Plan (RRSP), a valuable financial tool designed to empower Canadian taxpayers to save for retirement while enjoying significant tax benefits. Here’s everything you need to know about RRSPs, from contributions and deductions to withdrawals and strategies for maximizing your retirement savings.

What is an RRSP?

An RRSP (Registered Retirement Savings Plan) is a government-regulated investment account that offers Canadian taxpayers a tax-efficient way to save for retirement. By contributing to your RRSP, you not only enjoy tax deductions but also the opportunity for your investments to grow on a tax-deferred basis. However, it’s essential to understand that any funds withdrawn from your RRSP are subject to taxation.

What qualifies as earned income for your RRSP contribution room?

Your RRSP contribution room depends on your earned income, making it crucial to understand what qualifies as earned income. The following sources of income contribute to your RRSP room:

• Net employment & rental income: This category encompasses income derived from employment, including benefits such as overtime and bonuses. However, it’s important to note that employment insurance (EI) received during periods of unemployment doesn’t generate RRSP contribution room. Rental income, after accounting for relevant expenses, also contributes to your RRSP room.
• Business income: If you’re a business owner, the income you earn after deducting any business losses becomes part of your earned income. But keep in mind that income from investments or dividends paid to you as the business owner doesn’t create RRSP room.
• CPP (Canada Pension Plan): While CPP disability benefits contribute to your earned income, other CPP benefits do not generate RRSP room.
• Contribution room: The earned amount of income is multiplied by 18% which gives the maximum deduction limit for the following year subject to an annual maximum. Unused RRSP rooms can be carried forward indefinitely. A taxpayer who has $11,000 in unused RRSP deduction limits from previous years and a new RRSP deduction limit of $17,000 for the current year could contribute $27,000 in the following year, and deduct that full amount from that year’s taxable income. The over-contribution limit is $2000. The penalty is applied on over contribution @ 1%.

What investment options does an RRSP offer?

• An RRSP offers a wide range of investment options, including:
• Currency or Forex investments
• Bonds
• Exchange-traded funds (ETFs)
• Stocks
• Mutual or segregated funds
• Mortgage
• Call/put options
• Investment-grade gold and silver

While these options provide diverse opportunities for your RRSP investments, certain items cannot be held within your RRSP:

• Shares of a corporation in which you or your family members hold more than a 10% stake
• Futures contracts or derivatives
• Art and antiques

Additionally, employing a mortgage in your RRSP requires following specific procedures.

What are the key contribution dates for RRSPs, and how can spousal contributions impact your retirement planning?

Contributions to your RRSP can be made until December 31st of the year in which you turn 71. Furthermore, you can contribute to your spouse’s or common-law partner’s RRSP if it’s advantageous for income splitting. However, withdrawals from a spousal RRSP can be attributed to the contributing spouse, limiting its effectiveness as a short-term income-splitting strategy.

How are RRSP withdrawals taxed?

Withdrawals from your RRSP are considered taxable income. A withholding tax is applicable, with rates varying based on the amount withdrawn:

• Up to $5,000: 10% withholding tax
• Between $5,001 and $15,000: 20% withholding tax
• Over $15,000: 30% withholding tax

What are the beneficiary designations allowing for a possible rollover?

Following beneficiary designations for a deceased that allow a possible rollover.

• Spousal or common law partner
• Dependent child/grandchild having income below the basic personal amount. The child must withdraw the amount by the year the child turns 19. By annuitizing the tax burden is spread over the years until the child turns 19.
• A child or grandchild with a disability could be named as a beneficiary and can be of any age. Alternatively, up to $200,000 can be transferred to RDSP.  

What options are available when your RRSP matures?

The RRSP matures before December 31st of the year in which the RRSP annuitant turns 71. There are three options available at maturity.

• Annuity:  RRSP could be converted to a registered annuity before the annuitant turns age 71.  
• RRIF: The registered retirement income fund allows the continued tax deferral, without any further contributions. Annual withdrawals are mandatory right from the year it is established.
• Cash: The entire amount saved in the RRSP can be withdrawn as cash which results in this amount to be added in the income. This is generally the lesser desired option, provided the amount saved is small.

The RRSP is most effective when a taxpayer earns income at a higher tax bracket while working, and is likely to be in a lower tax bracket during the retirement years. The compounding effects of reinvested tax savings generated by contributing to an RRSP can be very beneficial. The withdrawals from RRSP are not taxed when used for a First-time Homebuyer plan and Lifelong Learning Plan.

How can RRSPs help first-time homebuyers?

Under the First-Time Homebuyer Plan (HBP), each spouse can withdraw up to $35,000 to use for the purchase of a qualifying home. To be eligible, the funds must have been held in your RRSP for at least 90 days before the withdrawal. It’s important to note that you or your spouse should not have owned a home in Canada in the previous four years, including the current year. Importantly, owning a rental property does not disqualify you from utilizing the HBP since it is not considered a personal home.

Repaying the withdrawn amount under the HBP is a key aspect to consider. Importantly, repayments do not commence in the same year in which the withdrawals are made, nor do they start in the immediate year following the withdrawals. In practical terms, this means that if you make an HBP withdrawal in 2021, your first HBP repayment will be due in the 2022 RRSP contribution year.

This essentially provides a window that extends up to 60 days into 2023 for making your initial repayment. It’s worth noting that you don’t need to have available RRSP room for these repayments, and you cannot assign spousal RRSP contributions as HBP repayments. Keep in mind that the RRSP room utilized for HBP withdrawals cannot be regained.

How does the Lifelong Learning Plan (LLP) for educational funding through RRSPs work?

The Lifelong Learning Plan (LLP) is designed to help you invest in your education or professional development, ensuring that you continue to grow throughout your life. Here’s a concise breakdown:

• Eligibility: To access the LLP, you must be an adult enrolled in a full-time education program.
• Withdrawal limits: Each spouse can withdraw up to $20,000 from their RRSP for eligible education expenses. If both spouses have sufficient funds in their RRSPs, the combined maximum allowable withdrawal increases to $40,000.
• Annual withdrawal: You can withdraw a maximum of $10,000 per year from one RRSP, which means a couple can access up to $20,000 per year for their education.
• Repayment schedule: The repayment of LLP withdrawals must commence in the earliest of either the fifth year after your initial withdrawal or the first year after you cease to be enrolled in an eligible educational program. This repayment is structured over a ten-year period.

How do Group RRSPs work?

Many employers offer Group RRSPs, where they contribute to employees’ RRSPs through payroll deductions. While employees may incur taxable benefits, these are offset by corresponding tax deductions. Additionally, some Group RRSP providers restrict the use of programs like the First-Time Homebuyer Plan and Lifelong Learning Plan for funds saved within the plan.