Registered Retirement Savings Plan (RRSP)

What Is a Registered Retirement Savings Plan (RRSP) in Canada?

An RRSP is a retirement savings plan that you (your spouse or common-law partner) can contribute to. By making RRSP contributions, you can deduct those contributions from your taxable income. This will lower your tax bracket for the current year. They are considered investments for your future retirement. The taxes are not avoided, they are a tax deferral.

Types of RRSPs

How do RRSPs operate in Canada?

It’s a tax-advantaged account, which means that the government of Canada created them to provide tax breaks to people who invest their money into RRSPs as a way to motivate them to save money for their retirement.  

RRSPs are tax-deferred, meaning any money you contribute will be exempt from CRA tax the year you make the deposit, and will only be taxed years down the line when you withdraw it.  RRSPs are a great way to save on a current-year’s tax bill.  Remember it is a tax deferral though and eventually, you will need to pay taxes, hopefully at a more tax advantageous time in your life

How to open an RRSP in Canada.

It’s as easy as speaking with one of our Experior Financial Group Associates.  They will do a full financial assessment with you to find out what you need from your investments to retire in a way that meets your needs and goals. An assessment can take 20 minutes to an hour and is well worth the investment of your time.

Benefits of a Registered Retirement Savings Plan or RRSP?

Once you understand how RRSPs with the Canadian Income Tax Act works, you will find that it is a great tax benefit for the average Canadian. At retirement, Canadians on average, make less money during retirement and therefore will be in a lower tax bracket. This is one of the main advantages of an RRSP, you receive a tax refund at the end of the year while contributing, in most cases, and then once in retirement when you pull the money out you will be taxed less because you are in a lower tax bracket.

Think of it like an umbrella, you wont get wet as long as you are under it, but as soon as the umbrella gets pulled away, hopefully it is less rainy (less tax). Another great benefit of making contributions to an RRSP is that you can lower your taxes by claiming them on your tax return  and any earnings that you make on your investment won’t be taxed as long as you leave them in your RRSP. 

As you approach retirement, make sure you take advantage of the government program that allows you to transfer your RRSP savings directly into a Registered Retirement Income Fund. Also, contributing to a spousal RRSP is a great idea – especially if you’re earning more than your spouse. This increases your spouse’s retirement savings while reducing your own taxes.and ensures that your retirement amount will be split more equally between you and your spouse.

Your RRSP also offers you the flexibility to use it for a down payment as a first-time home buyer when you are ready to buy, or use it for your own education..

Benefits of working with an Experior Financial Group Associate

An Experior Financial Group Associate goes through a full needs analysis with their clients. In fact, we go the extra mile and make sure that our clients are not just taken care of when it comes to insurance and investments, but we also have other  products that are all interrelated to financial planning. We make sure our clients are able to capitalize on by having a well rounded financial plan. 



FAQ

The first RRSP, then called a registered retirement annuity, was created by the Government of Canada in 1957. Back then, you could contribute up to 10 percent of your income to a maximum of $2,500.

Depends on what income bracket you’re in and how much you contribute to your RRSP. It depends on your  salary or pay and the more money you invest in an RRSP, the lower your income taxes will be. You can expect to get 20% to 50% of your RRSP contribution back as a tax refund.

You can contribute to your RRSP until the 31st of Dec in the year you turn 71. Afterwards, you must choose from the following scenarios:

A) Withdraw cash from RRSPs

You can choose to withdraw a portion or all of your funds from the RRSPs as cash. The amount withdrawn would need to be declared as income on your tax return for the given year; a withholding tax would apply. It is not recommended to pull it all out right away as this would put you at a higher tax bracket.

B) Convert your RRSPs to a Retirement Income Fund (RRIF)

To avoid the tax implications of a large cash withdrawal, many people convert their RRSPs and transfer their assets into a RRIF. You can convert your RRSPs to RRIFs any time before Dec. 31 of the year you turn 71 years old.

C) Buy an Annuity 

An annuity is a product that can be purchased from an insurance company with funds from RRSPs or RRIFs. In return for a deposit, the insurance company will provide money with interest for a defined period. payment amounts are locked, cannot be changed, and are received in regular intervals (monthly, quarterly, etc).

 

There are two types of annuities: term certain and life. A term certain annuity provides a guaranteed  amount for a fixed term, from time of purchase extended to the age of 90. If you were to die before the end of the term, regular payments are made to your estate. A life annuity provides a regular amount for your remaining life and stops at death; but no money will go to your estate.

 

Upon death, the RRSPs are deemed to have collapsed. The taxation consequences really depend on who is listed as the beneficiary of the RRSPs. The general rule for RRSPs or an RRIF is that the value of the RRSPs or RRIF at the date of death is included in the income of the deceased for the tax returns in the year of your death.

 

There are three exceptions to this rule where the tax can be deferred if the beneficiary of the RRSPs, RRIF, or estate is one of three parties:

 

the spouse or common-law partner

financially dependent children or grandchildren under 18 years of age, 

financially dependent mentally or physically infirm children or grandchildren of any age.

When a person passes away, it’s often possible to roll the RRSPs over to a beneficiary on a tax-deferred basis. If the beneficiary is a spouse, common-law partner or a financially dependent child or grandchild with a mental or physical disability, the beneficiary can request that it roll over to the beneficiary’s RRSPs or RRIFs.

Best to speak with an Experior Financial Group so they can do a full financial analysis to determine the best plan of investing for you. You will understand things like your contribution limits, tax benefits, taxable income, tax savings, deduction limit, capital gains, investment certificates, RRSP contribution limit, tax free savings account, rrsp investments, tax advantages and more.  You’ll be in good hands and ready for a retirement that meets your goals.

Yes you can, but you generally have to pay tax when you cash in, make withdrawals, or receive payments from the plan.

 

If you own locked-in RRSPs, generally you will not be allowed to withdraw funds from them. If you do not know if your RRSPs are locked in, contact your issuer. If your RRSPs are not locked in, you will be able to withdraw funds at any time.

RRSP contribution room is also referred to as your “RRSP deduction limit,” because the amount you deposit to it can be claimed as a deduction on your annual tax returns.

 

How much you’re allowed to contribute each year is proportional to your income, up to a maximum dollar amount. If you don’t max out your RRSP’s limit, any unused contribution room carries forward as a tax deduction to future years.

 

You can contribute up to 18% of your earned amount from the previous tax year, or the annual maximum dollar limit set by the Canada Revenue Agency (CRA). For the 2021 tax year, the maximum contribution limit is $27,830.

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