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For the 2022 tax year, the contribution deadline is Monday, March 1, 2023.
An RRSP is a retirement savings and investment vehicle for Canadian workers and self-employed business owners. Its main advantage as a savings tool is to reduce your taxable income so you pay less income tax at tax time, and earn tax-free interest on your savings while it grows. Since it is really a “tax deferral” you will only pay income tax when you withdraw money from your RRSP (or RRIF) when your income will likely be lower, meaning you’d pay less in taxes at that tine.
When you invest in a Registered Retirement Savings Plan, your money is usually held in cash or placed in stocks, bonds and other securities. You’ll only be able to contribute a certain amount of money to it each year, but this amount can be rolled over to future years if you can’t make your maximum contributions right from the beginning.
Whatever money you invest into your RRSP will grow with interest over the course of many years. When you enter retirement, you can withdraw your savings all at once or transfer the money to a Registered Retirement Income Fund (RRIF) or an annuity if you want a more sustainable stream of income.
There are a couple of RRSP rules to remember if you want to maximize your savings:
As of 2022, the maximum RRSP contribution limit is 18% of earned income up to a maximum RRSP contribution of $29,210 (whichever number is smaller). You’ll be able to carry forward any unused contributions to future years.
For example, if your contribution limit is $20,000 and you put in $5,000, then you can carry forward $15,000. The contribution deadline is usually 60 days after the last day of the year you want to file (typically around March 1). For the 2022 tax year, the contribution deadline is Monday, March 1, 2023.
You can calculate your RRSP contribution room by multiplying your pre-tax income by 18%. This means if you make $60,000 per year x 18%, then your contribution room for the year would be $10,800. You can also find out how much contribution room you have for the year in question on your previous year’s Notice of Assessment.
For high-income earners, the maximum contribution is set by the Canada Revenue Agency. For example, the maximum RRSP contribution for 2022 is $29,210. This means that if you make a high salary, you can only claim the maximum amount even if it works out to less than 18% of your income.
Keep these RRSP rules in mind when calculating your contribution room to make sure you don’t over-contribute to your RRSP:
The RRSP over-contribution penalty for making an over-contribution to your RRSP is 1% of the excess contributions in your account. For example, you’ll pay $30 a month to keep an excess contribution of $3,000 in your account (0.01 x $3,000 = $30). You’ll need to pay this penalty on any surplus you put in over $2,000 for as long as the over-contribution stays in your account. To avoid this penalty, you simply need to withdraw your excess funds.
When you turn 65, you can start making withdrawals from your RRSP without paying heavy penalties. You’ll have up until the age of 71 to make your withdrawals, at which point your RRSP will need to closed or transferred to another investment product, such as an RRIF. You can also make withdrawals before you turn 65 if you’re willing to pay a hefty tax.
You can make an RRSP withdrawal when you reach retirement age in one of three ways:
If you want to withdraw from your RRSP early, any withdrawal you make will be immediately subject to a withdrawal tax (also known as a “withholding tax”) proportional to how much you took out. RRSP withholding tax rates are outlined in the table below:
|Amount of withdrawal||Tax rate (across Canada)||Tax rate (in Quebec)|
|Up to $5,000||10%||5%|
|Between $5,000 and $15,000||20%||10%|
|If your marginal tax rate is higher than the RRSP withholding tax rate, you can also expect to pay additional income tax at the end of the year.|
Source: “Tax rates on withdrawals” by Government of Canada
You’ll only be required to pay a withdrawal tax if you take money out early. This RRSP withholding tax won’t apply if you take your funds out after the age of 65.
There are plans that are offered by the government that allow you to withdraw from your RRSP early without paying withdrawal tax. The HBP is one of them. Under the Home Buyers’ Plan, you can take money out of your RRSP to buy or build a first-time home for yourself or a family member with a disability. In 2019, the government set the withdrawal limit under this plan at $35,000. You’ll have up to 15 years to repay this money back into your RRSP without being taxed.
There are two investment options that you can take advantage of: fixed-income assets and equities. Fixed-income assets are bonds, guaranteed investment certificates and cash held in an investment savings account. Examples of equity investments are publicly-traded stocks and equity exchange traded funds (ETFs).
The following assets and equities are RRSP eligible investments:
A Spousal RRSP can be used by married or common-law partners as a way to lower their collective taxes upon retirement. Typically, the higher-earning partner will contribute to the Spousal RRSP, which is registered under the name of the partner making less income. The lower-income spouse makes the investment decisions and is the only one who can withdraw from the account. Before retirement, the contributor to the account deducts the contributions to the Spousal RRSP from their taxable income just as they do for their individual account. It’s important to know that your contribution limit does not change if you are contributing to both an Individual and Spousal RRSP. Instead, the annual contribution limit is spread among your RRSPs.
In addition to an Individual RRSP and a Spousal RRSP, there are two other RRSP types: a Group RRSP and a Pooled RRSP. A Group RRSP is established by a company for its workers with contributions deducted from their paycheques. A Pooled RRSP is a retirement vehicle created for small business workers and employers as well as for the self-employed.
It’s easy to open an RRSP account if you know where to start. Check out some of the most commonly asked questions and who’s eligible below.
The management fees you’ll pay will depend on which provider you go with. You can save money on fees if you put your money with a reputable robo-advisor or self-directed trading platform. You’ll typically pay higher fees with mutual fund providers, big banks and private investment managers.
The interest rate you’ll get will depend on what type of investments you have and how they perform over time. For example, GICs are considered low-risk investments and often pay anywhere from 0.10-3% annually in interest, depending on the length of your term. You can generally make more from bonds, though the yield is still relatively conservative.
You can also invest in mutual funds, which are a mix of both stocks and bonds. These will often give you a higher return, though they may come with a higher level of risk. Many investors also choose to invest in exchange-traded funds using a self-directed platform or robo-advisor such as Wealthsimple. (Read our review on Wealthsimple.) This brings down the cost of management fees, which means you keep more money in your pocket.
Registered Retirement Savings Plans are one of the best ways to save for retirement in Canada. They let you earn tax-free interest on your savings and you can take advantage of tax breaks for every dollar you invest. The main downside of these funds is that it can be difficult to access the money you save until you retire without paying hefty penalties.
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