RRSPs at the heart of your retirement plan

Retirement plans are usually made up of many different components such as government and work place pension plans, but for many Canadians, it is a registered retirement saving plan at the centre of their nest egg-building activities.

Through the use on an RRSP, individuals can make investments in various permitted investments including GICs, ETFs, stocks and bonds in a more tax efficient manner than holding these types of investments in a non-RRSP account.

For all their tax-advantaged benefits, registered retirement savings plans do come with parameters, however. Knowing the details will help you make the most of your RRSP.

How much can an individual contribute to an RRSP?

The maximum amount an individual may contribute to RRSP in any given year is the lesser of 18% of your earned income for the previous year or the maximum contribution limit permitted under a tax legislation. In either case, the maximum contribution is further reduced by any amounts contributed to a company sponsored pension plan.

For the 2015 taxation year the maximum contribution limit for the year was $24,930 and will increase to $25,370 for 2016.

One of the benefits of an RRSP is that in a year where an individual does not have sufficient funds to make the maximum contribution any unused contribution room may be carried forward to a future taxation year.

What happens to the investments in an RRSP?

While invested in an RRSP the income earned on those investments is tax deferred. This allows an individual the opportunity to save more money now by deferring taxes until a later date when they may be paying lower taxes.

What are the tax consequences of withdrawing money from an RRSP?

Amounts withdrawn from an RRSP will be fully taxed. This is because the amount contributed to the RRSP in the first place was deductible. In most cases, taxes will be withheld on amounts withdrawn with the amount of tax varying with the amount withdrawn. Any tax withheld can be credited towards taxes owed in the year and may be refunded depending on the individual’s tax situation.

What happens on retirement?

In order to provide a retirement income, an RRSP must be terminated by the end of the year in which the owner of the plan turns 71. By that time all funds must be withdrawn from the RRSP and tax paid on the full amount withdrawn at that time or the proceeds from the RRSP may be used to purchase a permitted retirement income plan such as a Registered Retirement Income Fund (RRIF).

Are there other permitted uses for an RRSP?

While primarily intended for retirement, amounts can be withdrawn from an RRSP at any time subject to any restrictions imposed by the plan provider. In addition to saving for retirement, RRSP rules permit withdrawals on a tax preferred basis for purchasing a new home under the Home Buyers Plan, or returning to school through the use of the Lifelong Learning Plan.

TFSA vs. RRSP