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 a plan created by the Canadian
government to help you save for retirement. It is an account that provides you with a means to invest
for retirement while offering specific tax-saving features. Think of it as
an additional retirement fund to complement your Canada Pension Plan.
How does an RRSP
work?
The most important feature of an RRSP is its tax advantages. Here are
three tax-related features:
- Tax-deductible contributions: Contributions made to an RRSP are tax-deductible. This means that the amount you contribute to your RRSP can be deducted from your taxable income for the year in which you make the contribution. For example, if you earned $60,000 in 2023 and contributed $7,000 to your RRSP, you would only be taxed on $53,000. This can result in immediate tax savings, particularly beneficial during higher income years.
- Tax-sheltered growth: When you contribute money to an RRSP, the investments held within the plan grow on a tax-deferred basis. This means that any interest, dividends, or capital gains earned within the RRSP are not taxed while they remain in your plan.
- Tax-deferred withdrawals: While contributions are tax-deductible and growth is tax-sheltered, taxes on the funds within an RRSP are deferred until you make withdrawals. When you withdraw funds from your RRSP, you'll be taxed on both contributions and investment earnings. The advantage lies in potentially paying lower taxes during high-income years and reduced taxes in retirement when you might be in a lower tax bracket. It's important to note that you must begin withdrawing from your RRSP by the end of the year in which you turn 71, converting it into a Registered Retirement Income Fund (RRIF) with mandatory minimum annual withdrawals.
How much can I
contribute?
RRSPs are registered accounts and are subject to contribution rules. For the 2023 tax year, you can contribute 18%
of your previous year’s income or up to $30,780 - whichever is less. If you did
not max out your RRSP contributions from previous years' tax filings that unused
amount carries over. To determine how much contribution room you have, review
the Notice of Assessment you receive from the Canada Revenue Agency (CRA) after
filing your taxes. It states your contribution room for the current tax year.
You can also call the CRA
Tax Information Phone Service or log into CRA
My Account.
When is the
contribution deadline?
The RRSP deadline for the 2023 tax year is February 29, 2024.
What types of
accounts and investments are allowed in RRSPs?
You can hold many types of investments in an RRSP. They include:
- Cash
- GICs (Guaranteed Investment Certificates)
- Mutual Funds
- Stocks
- ETFs (Exchange-Traded Funds)
- Bonds
What happens
when I over-contribute to an RRSP?
The Canada Revenue Agency (CRA) imposes a penalty for overcontributions
to an RRSP. It is
1% per month on the amount that exceeds your RRSP contribution limit by more
than $2,000. This penalty is calculated for each month the excess contribution
remains in the account. The CRA allows a $2,000 lifetime overcontribution
allowance. This means you may not be penalized for the first $2,000 of
overcontribution. However, you can’t claim a tax deduction for any portion of
the $2,000 over contribution.
Talk to a
financial advisor
To
maximize the benefits of your RRSP contributions and take advantage of the
investment earning potential, consider consulting with a financial advisor.
UCU
Wealth Strategies Group can help you make informed investment choices. Your
advisor will
assess your financial situation and work with you to develop an investment
strategy tailored to your needs and retirement goals.
Information about RRSPs can be found on our website. You can make
an appointment with one of our advisors for personalized service.
No comments:
Post a Comment