RRSP
The principal and earnings inside an RRSP account can be deferred from taxation together.
For example, if you open a $5,000 RRSP account at a bank and make mutual fund investments within the account, the $5,000 contributed to the RRSP can be deducted from the taxable income for that year. For instance, if your annual income is $50,000, after deducting the $5,000, you will be taxed on $45,000. As long as this money remains in the RRSP account, both the principal amount and any generated earnings are not subject to taxation.
Where to open a RRSP account?
Most financial institutions can open a RRSP account. For example: banks, credit unions, trust and loan companies, insurance companies.
What types of products can be held in a RRSP?
A RRSP account can hold various income-generating investment products, depending on investment objectives and risk preferences.
For example: cash, Guaranteed Investment Certificates (GICs), bonds, mutual funds, Segregated Funds, exchange-traded funds (ETFs), and stocks.
To open an RRSP account, you need to be a Canadian tax resident. Additionally, since RRSPs are primarily designed for salaried individuals, the account holder must have active income (earned income) and have filed taxes. Active income includes wages, commissions, and other sources. The account holder must be below the age of 71, as once they exceed 71 years old, the RRSP account will automatically convert into a Registered Retirement Income Fund (RRIF).
RRSP Contribution Limit
The annual RRSP contribution limit is primarily determined by two figures: the first is 18% of the previous year’s taxable income, and the second is the maximum cumulative amount for the current year’s RRSP. The final individual annual RRSP contribution amount is the lower of the two figures.
The RRSP contribution must not exceed the contribution limit. Any excess amount will incur a monthly penalty of 1% (up to $2,000 excess contribution is exempt from penalties). Unused RRSP contribution room from the current year can be carried forward and accumulated for future years.
Types of RRSP Accounts
Individual RRSP
Individual RRSPs are registered in the individual’s own name.
Spousal RRSP
A Spousal RRSP is registered in the name of your spouse or common-law partner. Your spouse or partner owns the account, but you can contribute money to it. The contributions made to the account can be used for your own tax deductions and count towards your own RRSP contribution limit for the year. However, these contributions will not affect the RRSP contribution limit of your spouse or partner.
Group RRSP
A Group RRSP is typically a benefit provided by an employer to employees. A Group RRSP usually consists of two components: the first component is a portion deducted directly from the employee’s salary, for example, 5%, which is deposited directly into the Group RRSP account. The second component is the employer’s contribution to the Group RRSP on behalf of the employee, typically a certain percentage, such as an amount equivalent to 5% of the employee’s salary, which represents the employer’s matching contribution. The total of these two contributions is considered the employee’s RRSP contribution for the year.
Withdrawals and Account Transfers for RRSP
RRSP accounts allow withdrawals at any time, and the withdrawn amount is considered income for the year and taxed accordingly.
It is important to note that once RRSP contribution room has been used, it cannot be reused, except for the First-Time Home Buyer’s Plan (HBP) and the Life-Time Learning Plan (LLP).
FAQ for RRSP
What happens to an RRSP upon death?
When an RRSP account holder passes away, the entire funds in their RRSP must be included in their income for the year of death.
If a beneficiary is designated, the fair market value of all the assets in the RRSP will be passed on to the beneficiary.
In certain qualifying circumstances, eligible beneficiaries (such as a spouse) may be able to transfer these funds into their own registered plan on a tax-deferred basis, subject to specific conditions.
When is the best time to buy an RRSP?
The RRSP contribution deadline each year is the last day of February, which falls on the final Sunday of the month (or extended to early March).
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