You have until March 1, 2022, to contribute to your RRSP for the 2021 tax year. Check your CRA Notice of Assessment to find your contribution limit and save for your retirement while taking advantage of the many tax benefits.
If you are
considering opening an RRSP and want to learn more about it, here is a quick
primer to get you started.
What is an
RRSP?
A
Registered Retirement Savings Plan (RRSP) is an account created by the federal
government to help Canadians save for retirement. It is an account that provides
a way to invest for retirement with certain tax-saving features. Think of it as
an additional pension plan to supplement your existing government pension.
How does an
RRSP work?
The most
important feature of an RRSP is the way it is taxed. There are three tax
advantages to opening an RRSP – your contributions will be:
Tax-deductible
Your RRSP
contributions are made with post-tax dollars and your contribution amount will
be deducted from your income on your tax return. For example, if you earned $60,000
last year and contributed $7,000 to your RRSP - you would pay taxes as if you
earned $53,000.
The benefit – you will pay less income tax or you may even receive a tax refund.
Tax-sheltered
The
investments in your RRSP grow tax-free and you won’t pay tax on your investment
earnings while they stay in your plan.
The benefit – you get the benefit of tax-free compounding of returns.
Tax-deferred
You do not pay tax on the contributions
going into your RRSP - but you will pay
tax on the savings you withdraw from your RRSP, including both
contributions and investment earnings.
You must start withdrawing from your RRSP the year after you turn 71
years of age.
The benefit – you will pay less tax in your higher income years where you may be in a higher tax bracket and less tax in your retirement years where you may be in a lower tax bracket.
How much can
I contribute?
RRSPs are
registered accounts and are subject to contribution rules. For the 2021 tax year, you can contribute 18%
of your previous year’s income or up to $27,830 - whichever is less. If you did
not max out your RRSP contributions from previous years' tax filings that unused
amount carries over.
The easiest
way to check how much contribution room you have is to look at the Notice of
Assessment you receive from the Canada Revenue Agency (CRA) after filing your
taxes.
When is the
contribution deadline?
The RRSP
deadline for the 2021 tax year is March 1, 2022.
What types of
accounts and investments are allowed in RRSPs?
You can
hold many types of investments in an RRSP. They include:
- Cash
- Mutual Funds
- GICs (Guaranteed Investment Certificates)
- Stocks
- ETFs (Exchange-Traded Funds)
- Bonds
Can I over
contribute to an RRSP?
Canada
Revenue Agency will tax your over-contribution amount at the rate of 1% per
month until the amount is withdrawn from your RRSP. The CRA does allow a $2,000
grace amount for over-contribution - but that amount is not tax-deductible and
you will be charged tax on the amount.
Talk to a
financial advisor
Nothing
beats personalized advice. To get the most of your RRSP contributions and take
advantage of the investment earnings potential talk to a financial advisor. UCU
Wealth Strategies Group can help you make smart investment choices. They will
look at your financial situation and help you create an investment strategy
that is right for you and your retirement.
For more
information please visit your local Branch or the UCU website.
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