RRSP’s are a very well known product, and there is countless amount of information about it. However, I always find I have to dig through various resources to the find the information I need.
So I have made an attempt to summarize some of the key and useful points about RRSPs.
1. RRSP stands for registered retirement savings plan. You can set up an RRSP at a bank. You can set it up as a savings account or as a self directed RRSP where you can buy and sell stocks , bonds etc.
2. The contributions you make to an RRSP will reduce the amount of income taxes you have to pay in the corresponding year. For example lets say your income is $40 000 CAD , and you contribute $5 000 CAD to an RRSP, now your taxable income went from $40 000 to $35 000. At $40 000 income level, you would have paid income tax of $6,071. AT $35 000 income level, your tax payable amount reduced to $4,978. Now you would recieve a refund of $1093. Also any investments gain you make such as capital gains, interest expense in an RRSP is not taxed as long as you dont withdraw the money.
3. The purpose of an RRSP is to provide an incentive for you to save for retirement. As a result if you make a withdrawal before the age of 65 there are tax implications such as below for all of Canada except Quebec :
* 10% on amounts up to $5,000;
* 20% on amounts over $5,000 up to including $15,000; and
* 30% on amounts over $15,000.
Your taxes maybe actually higher depending on your tax bracket.
4. Another way government discourages you from early withdrawal is by taking away your contribution room, once you have withdrawn an amount. For example if you are allowed to contribute $100 000 CAD into RRSP over your life time, and if you currently have $20 000 CAD, and you have withdrawn $10 000 this year. The maximum amount you can have in your RRSP over your life time is $90 000 CAD ( including the $10 000 CAD ) you still have in your account.
5. One of the biggest ways you can increase your RRSP every year is through employee contributions. A lot of employer’s have plans where from each of your pay cheque they would match either 100% or 50% up to a certain percentage. For example, one of my former employers had the following policy. If I contributed 4% of my paycheck to RRSP, they would match that amount. So say my paycheck was $2000 CAD before tax. 4% of that is $80. I would contribute $80 every pay check. My employer would match that and contribute $80 as well. By doing this I am now putting away $160 CAD every paycheck. That adds up to $320 a month, and $3840 a year. Lets say you start doing this at the age of 30, by the time you reach 62 ( average retirement age for Canadians ), assuming a moderate return rate of 5% every year, you would have accumulated $457 092CAD.
6. When you are buying your first home,you can take up to $25 000 from your RRSP account without having to pay any tax. You have up to 15 years to repay this amount back to your RRSP. Each year you have to pay approximately 1/15 of the amount. The tax department will send you a “Home Buyers’ Plan (HBP) Statement of Account” , showing the portion of amount you owe revenue Canada for the next year. If you fail to pay this amount, that amount will get added to your income, and you will have to pay tax on it ! The process to withdraw the fund invovles filling out this form , and submitting it to your RRSP holder ( whether it be the bank or an insurance company ).
7. You can also take money out for school from your RRSP. It has to be a full time program. This program is called Lifelong Learning Plan(LLP). You can withdraw up to $10 000 CAD a year to a total maximum of $20 000 CAD. The interesting thing about this program is that you can withdraw $10 000 in a year regardless of how much the program costs as long as the program you are in is a full time program. You have up to 10 years to repay the LLP withdrawl. Similar to the Home buyer’s plan you must pay 1/10 of your withdrawl amount each year as repayment or else that portion will get added to your income, and you would need to pay tax on it. Once you repay your LLP withdrawl, you can participate in it again if you are in a full time program. The process to withdraw the fund invovles filling out this form , and submitting it to your RRSP holder ( whether it be the bank or an insurance company ).
8. When you turn 71, you have a couple of things you can do with your RRSP.
•transfer them to a RRIF;
•use them to purchase an annuity for life; or
•use them to purchase an annuity spread over a number of years.
If you withdraw the funds, you will be taxed. The other 3 options are a way for you to set up your total money in your RRSP to be paid out to you as income each year. In this case you will be taxed at the income you recieve each year.
According to statistics, in Canada you or your spouse will live to the age of 90. So it makes sense to contribute to your RRSP, and take care of your future.
Reference : Canada Revenue Agency