Registered Retirement Savings Plan (RRSP)
Learn more about what an RRSP is and how using one can benefit you.
What is an RRSP?
An RRSP is a retirement savings plan that allows you to defer your tax liability to a future date. When you contribute to your RRSP you receive a dollar for dollar deduction. What does this mean, you might ask. A dollar for dollar deduction means your taxable income is reduced by the same amount as your contribution.
How it works
For example: If your income is $60,000 and you contribute $10,000 in your RRSP, your taxable income would be $50,000. You would receive a $10,000 deduction equivalent to your contribution amount of $10,000.
In this example, the taxpayer has successfully deferred $10,000 in taxable income. This amount would be taxable when the taxpayer decides to withdraw from their retirement savings account. The year the RRSP is withdrawn, the amount that is withdrawn is added to the taxpayer’s taxable income.
If you are a Canadian resident withdrawing from your RRSP, you will be subject to a 10% withholding tax. This means if you withdraw $100,000, $10,000 will be withheld at the source by your financial institution. Non-residents of Canada are subject to a 25% withholding tax.
Setting up an RRSP
An RRSP can be opened through a financial institution. This includes banks, credit unions, and insurance companies.
We at Team Tax can provide you with tax advice and planning to ensure you choose the correct RRSP for you.
Some examples of retirement savings plans include:
Spousal RRSP: Allows you to split income between yourself and your spouse
Self-Directed RRSP: Allows you to manage your own investment portfolio
How much can I contribute to my RRSP?
It is important to note your RRSP deduction limit. Your RRSP deduction limit is the maximum amount of contributions you can make into your retirement savings account.
We at Team Tax can provide you with your RRSP deduction limit and forecast your future contribution room. In 2019 an individual’s RRSP deduction limit was calculated as the lesser of 18% of your earned income or $26,500.
This means the maximum your RRSP contribution room can grow by per year is $26,500. You can conveniently view your RRSP deduction limit on your most recent Notice of Assessment (NOA) or online via CRA my account.
Want to be informed about the hidden costs when withdrawing from an RRSP?
Contact us today for a free consultation and we can offer you insights on tax sheltering strategies, RRSP tax deferrals and protecting the value of your RRSP by not making early withdrawals.
It is very important you choose the correct plan for your lifestyle when choosing an RRSP. The last thing you want to do is permanently lose your RRSP contribution room by making untimely withdrawals.
There are effective tax strategies in place such as the Home Buyer’s Plan (HBP) that allows you to withdraw from your RRSP without losing any contribution room. Let our Team help you maximize your retirement savings!