What is an RRSP ?
A Registered Retirement Savings Plan, or RRSP, allows for saving in a special savings plan that is registered by the Canadian
Revenue Agency also known as the CRA and provides the holder with a tax reduction.
It can contain a variety of investments including:
Savings deposits, treasury bills, guaranteed investment certificates (GICs), stocks, mutual funds, and bonds.
Contributions to it are tax deductible and when you reach the age of 71 you must convert the plan into a Registered Retirement Income Fund - RRIF or an annuity.
Benefits of RRSPs
By contributing to an RRSP you have the ability to deduct the total amount of your annual contribution from your gross income at tax time,
reducing the amount you pay in income tax that year.
The income earned in an RRSP is not taxed until the money is withdrawn from the RRSP.
Contributions to an RRSP
Your most recent Notice of Assessment you received from Canada Revenue Agency will provide you with the
amount you can contribute to your RRSP for the current year.
You can make contributions to your RRSP until December 31st of the year in which you turn 71.
The maximum amount you can contribute in 2014 is $24,270 and in 2015 is $24,930
Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, or
- The remaining limit after any company sponsored pension plan contributions.
Earned income includes salary or wages, alimony received, and rental income, etc. but does not include items such as investment income.
Types of RRSPs
Retirement Savings Plans can be set up as;
An Individual RRSP which is associated with one person who is called the account holder. The account holder is also called the contributor as they are the only one who is placing money
into the account.
A Spousal RRSP which allows the higher wage earner, known as the spousal contributor, to contribute to an RRSP that is in their spouses's name. The spouse is the account holder and the spouse can make withdrawals subject to tax after a holding period.
Spousal RRSPs are used as a means of splitting income in retirement which allows for the marginal tax rate to be lower for both spouses compared to one spouse earning all of the income.
A Group RRSP is set up so employess can make contributions through a set of regular payroll deductions. The employee decides on the amount of the contribution per year. The employer will deduct the amount chosen by the employee and submit it to the investment manager that administers the group plan.
The contribution is then deposited into the employee’s individual account and invested as specified.