Invest in RRSP
Invest wisely, retire early
According to a recent survey by BMO, due to inflation and rising prices, Canadians now believe they need 1.7 million dollars in savings to retire. However, every year, many Canadians still struggle with whether they should purchase RRSPs and how to go about it.
Ultimately, this is mainly because people lack a comprehensive and clear understanding of the advantages and functions of RRSPs.
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We can help.
What is an RRSP?
Before you start using RRSP for investment, it's important to understand how does it work
Registered Retirement Savings Plan is a Canadian account that can be used for savings and investments. Taxpayers have a high degree of autonomy within the rules set by the government, making it a savings plan. Generally, RRSP has two main advantages: first, the amount purchased in RRSP each year can be deducted from the current year’s income tax; second, RRSP can help high-income individuals achieve deferred taxation.
Usually, you can easily open an RRSP account through financial institutions such as banks, investment companies, and trust companies. You have the option to contribute monthly, annually, or make a lump-sum purchase of RRSP.
As long as you have earned income, a Social Insurance Number (SIN), have filed taxes, and have available RRSP contribution room, Canadian permanent residents under the age of 71 are eligible to purchase RRSPs. Even if you’re over 71, you can still contribute if your spouse is under 71, allowing you to enjoy the benefits of a Spousal RRSP.
The contribution limit and time limits for RRSPs
As a government-registered CRA account, RRSP, like other registered accounts, has contribution limits.
- The RRSP contribution limit for each individual in the current year is 18% of the previous year’s income or the maximum RRSP limit for the current year, whichever is lower. (The RRSP contribution limit for the year 2023 is 18% of the income earned in 2022 or $30,780, whichever is lower.) This limit includes any unused contribution room from previous years and is reduced by pension adjustments. You can check your remaining RRSP contribution room for each year by logging into the CRA website.
- If your contributions exceed the annual maximum contribution limit, the excess amount will be subject to a penalty of 1% per month.
- If your income has increased compared to the previous year, your contribution limit for the next year will also increase. However, it will still not exceed the maximum limit set by the CRA.
- While you can purchase RRSPs at any time during the year, only those purchased within the first 90 days of the following year allow you to claim an income tax deduction for the previous year. This means that contributions made before March 1st qualify for the deduction. It’s advisable to make contributions by this date.
The annual RRSP contribute limit for each of the years from 2018 to 2024 are:
| Year | Limit |
|---|---|
|
2018 |
$ 26,230 |
|
2019 |
$ 26,500 |
|
2020 |
$ 27,230 |
|
2021 |
$ 27,830 |
|
2022 |
$ 29,210 |
|
2023 |
$ 30,780 |
|
2024 |
$ 31,560 |
How to manage your RRSP
Generally, RRSP accounts have two management methods:
- Making investment decisions entirely on your own without professional brokers providing advice and services.
- Having designated financial advisors providing advice and services, usually from banks or financial institutions.
If you are not a professional investment practitioner, we recommend that you choose the services of institutions and professional advisors.
Ai Financial has professional investment advisors to provide personalized advice and product selection based on clients’ actual financial situations. At the same time, we are subject to the highest level of financial supervision and management, so customers do not need to worry about the safety of their funds.
Can you withdraw from your RRSP before you retire?
You can withdraw from your RRSP at any time but there are 3 main considerations:
You’ll lose the benefits of your earnings compounding which can have a large impact over time.
There’s an upfront withholding tax and the withdrawal amount is added to your taxable income in that year.
You permanently lose the contribution room for the amount you take out.
Times you may want to withdraw
You can withdraw funds from your RRSP tax-free to buy your first home or help fund you or your spouse’s education, within certain limits.
HBP - Home Buyers' Plan
$35,000 for your first home
Withdrawal of up to a maximum of $35,000 CAD
First-time homebuyers are eligible to withdraw a maximum of $35,000 CAD from their account.
However, the amount must be repaid within 15 years, with repayments starting in the second year after the withdrawal.
LLP - Lifelong Learning Plan
$20,000 for your education
The plan provides RRSP account holders who are currently enrolled in school with an annual withdrawal limit of at least $10,000 CAD, which can be doubled in certain cases.
However, the entire amount must be repaid within ten years; otherwise, it will be considered as income for that year and subject to full taxation.
What types of products can be held in a RRSP?
Don’t let the term ‘savings’ plan limit you.
Investing in RRSP is a long-term commitment that allows you to benefit from compound interest. Choosing the right investment options not only optimizes your tax situation but also maximizes your benefits.
Ai Financial offers this investment opportunity:
Segregated Funds
Segregated fund policies give you the freedom to invest while offering insurance protection to preserve your savings. With our choice of guarantees, you can expand your wealth and secure it at the same time.
You can purchase Segregated Funds using various accounts, including but not limited to TFSA, RRSP, RESP, Non-Reg, etc.
Common Misconceptions About RRSP
This misconception mainly arises from the following consideration: While buying an RRSP allows for tax deductions now, the amount withdrawn in the future will still be subject to taxation. Therefore, the belief is that purchasing an RRSP is not beneficial.
This viewpoint is incorrect because an RRSP offers not only tax deductions but also a significant tax deferral feature. This tax deferral means that when you buy an RRSP while working, the amount you contribute is not considered part of your income for that year, and thus, it is not subject to taxation.
Here’s an example: Let’s consider an individual with an annual income of $30,000. If they do not invest in an RRSP, they would owe the government $4,550 in taxes that year. However, if they contribute $2,000 to an RRSP, their taxable income for the year would be reduced to $28,000, resulting in a tax payment of $4,100. This would lead to a tax refund of $450. When this $2,000 contribution is withdrawn after retirement when they have no employment income, it would be subject to very little or no taxation. This is because each individual has a tax-free income threshold every year; for this year, it’s over $10,000. Therefore, the $2,000 contribution might not be subject to taxes at all, and even if it is, it would likely be much lower than the tax rates applied to their current salary. This exemplifies the tax deduction and tax deferral benefits of RRSPs.
After you’ve contributed to your RRSP, the funds can be withdrawn at any time. However, if you withdraw from your RRSP account before retirement, the withdrawn amount will be treated as income for that year. Additionally, you’ll need to pay a withholding tax, which varies based on the province and the amount withdrawn. On the other hand, if you withdraw after retirement, you won’t have to pay the same withholding tax.
Exactly, you’ve hit the nail on the head. The decision between RRSP and TFSA should be based on individual circumstances, including your current income tax bracket, future potential income tax levels, and your family situation. Contributing to an RRSP can lower your household income and potentially make you eligible for benefits you wouldn’t have otherwise qualified for, or even increase the benefits you receive. Therefore, it’s not a one-size-fits-all situation, and low-income individuals or families may find RRSP to be a beneficial option rather than solely choosing TFSA.
RRSP can be purchased at any time during the year. Purchasing RRSP outside the “RRSP Season” allows you to deduct the contribution from your current year’s income, reducing the income tax you need to pay. On the other hand, buying RRSP before March 1st of the following year allows you to claim it as a deduction against your previous year’s income, reducing the taxes owed for the previous year. Therefore, the period from the beginning of the year to this deadline is known as the “RRSP Season.”
If you are temporarily short on cash and can’t contribute to your registered retirement savings plan (RRSP), an RRSP loan may be just the thing for you. In fact, the money you receive from your tax return and investments might even cover the cost of the loan.
This way, you can continue to contribute to your RRSP or increase your contributions, no matter your financial situation. What’s more, if you use your tax return towards payment of your loan balance, the loan will be repaid more quickly.
About RRSP, you might also want to know...
What's the safest way to invest in Canada? RRSP + Segregated Funds
The three most important investment principles are: first, preserve your capital; second, preserve your capital; and third, remember the first and second principles.
To some extent, RRSP is worth purchasing. It offers short-term tax benefits and long-term financial support for retirement. However, from the time of purchasing RRSP to using it in old age, there are decades in between. How should you manage or invest your RRSP account during this period? How can you ensure that the returns on your RRSP investments will truly serve your retirement needs? This raises the question of ensuring the security of RRSP investments.
Combining RRSP with Segregated Funds>>>
PAD with RRSP - Grow Your Funds Automatically, Efficiently, and Effortlessly
A pre-authorized debit allows the biller to withdraw money from your bank account when a payment is due. Pre-authorized debits may be useful when you want to make payments from your account on a regular basis. On the specified deduction dates, the distributor automatically deducts the predetermined amount from the investor’s designated bank account and executes the purchase of the chosen fund.
By setting up a dollar-cost averaging plan with Ai Financial, you can schedule regular deductions from your bank account into your designated investment account (TFSA/RRSP/RESP/Non-Registered, etc.) on a weekly, bi-weekly, or monthly basis. Once you initiate this regular investment strategy, the long-term appreciation of your funds is likely to pleasantly surprise you.
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