As we head into February advertisements for RRSPs will be all over the airwaves, here are a few things you need to know before investing in an RRSP.
A Registered Retirement Savings Plan (RRSP) is not an investment in itself; but rather an account that you hold investments within. An RRSP is not tax-free, it is a savings plan that allows you to put off paying tax on income until you are in a lower tax bracket, usually in retirement.
Three advantages of investing in an RRSP
1. Immediately reduces your taxable income
When you file your income tax every year, you claim a tax deduction for the amount you have contributed into your RRSP. This deduction reduces your income dollar for dollar, and you will receive any tax paid on that amount of income back in form of a refund (all else being equal).
2. Savings grow tax-free inside the plan
The money inside your plan can be invested in various types of investments, including mutual funds, GICs, stocks, ETFs, bonds and more. The earnings or growth on your investment is not taxed annually, therefore your money will compound much faster within the plan.
3. Defer paying tax
You pay no tax on your RRSP dollars until you withdraw the money from the plan. This is usually in retirement when you are not working and in a much lower tax bracket. All the money coming out of the plan is taxed the same, similar to employment income.
The RRSP contribution limit is 18% of your previous year’s earned income to a maximum of $29,210 (for 2022). This amount is adjusted annually for inflation and will be reduced by any contributions made to an employee pension plan. If you do not contribute the maximum amount in a given year, the difference is added to the following year’s contribution limit. Unused contribution amounts are carried forward indefinitely and can be used to reduce taxes in future years.
You may contribute up to $2000 above your contribution limit without penalty. However, the over contributed amount will not be allowed as a tax deduction and any amounts over $2000 will be subject to a 1% per month penalty until withdrawn.
The only time you can withdraw money from your RRSP tax-free is under the First Time Home Buyers Plan ($35000) and the Lifelong Learning Plan ($20,000). However, you do have to recontribute the money back into your RRSP within a specified time period; 1/15th over 15 Years for RRSPs and 1/10th over 10 years for LLP. If you do not recontribute your annual amount, it will be added to your income and will be subject to tax.
The last day to put money into your RRSP is December 31st the year in which you turn 71 yrs. After age 71 you must convert your RRSP into a Registered Retirement Income Fund (RRIF). At this point you must withdraw a minimum amount annually and pay income tax on it. The amount is based on a percentage of assets you hold in the RRIF on January 1st, this percentage starts are 5.28% and goes up slightly every year.
The deadline to make an RRSP contribution is 60 days after the end of the year, for 2022 it is March 1st.
I hope you have found this information helpful, if you have any questions or want to contribute before the deadline, please don’t hesitate to contact me.
Have a great week,
Tracey
Sources: Original article posted on Advisor.ca by Michelle Schriver 10-13-15, and Dynamic Funds, CCRA website, MT 02-03-23
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