Flash Retirement

Everything You Need to Know About RRSPs

A registered retirement savings plan (RRSP) is a savings strategy that lets you accumulate the funds you need for retirement. Do you know how individual RRSPs, group RRSPs, and self-directed RRSPs differ? For more information, read on!

Individual RRSPs

Who can contribute to an individual RRSP?

  • You can contribute to an individual RRSP if you have employment or business income or unused contribution room.
  • You cannot contribute to an RRSP if your income consists solely of property income, such as investments, royalties, capital gains.
  • There is no minimum age for contributing to an RRSP. However, you must be at least 18 to contribute more than $2,000.
  • For the first year you contribute to an RRSP, you must have filed an income tax return the previous year and declared employment or business income.
  • Consult the notice of assessment sent to you each year by the Canada Revenue Agency (CRA - formerly the Canada Customs and Revenue Agency) to find out how much you can deduct on your income tax return.

RRSPs and income tax

  • All RRSPs must be registered with the CRA.
  • An RRSP is a tax-deferral mechanism, not a tax exemption.
  • RRSP contributions are tax deductible at both federal and provincial levels, within prescribed limits.
  • Investment income accumulated in an RRSP is tax free until cashed in.
  • RRSP withdrawals are taxable, unless they qualify for the Home Buyer's Plan (HBP) or the Lifelong Learning Plan (LLP).
  • RRSP withdrawals made under the HBP or LLP must be paid back to an RRSP through annual payments amortized over a set period. If unpaid or only partially paid, the outstanding balance will be added to your taxable income.
  • In order to claim a tax deduction for a given year, you must have contributed to your RRSP within the first 60 days of the following year at the latest.
  • The contribution limit is $26 230 for 2018 and $26 500 for 2019. This amount is determined by the CRA. You can contribute up to 18% of your eligible income from the previous year, up to the maximum contribution plus unused contribution room.
  • If you belong to a pension plan or a deferred profit sharing plan (DPSP) offered by your employer, your RRSP contribution limit is equal to 18% of your eligible income from the previous year minus the pension adjustment calculated by your employer. Refer to your notice of assessment before you contribute.

Contributions and withdrawals

  • If you want to contribute to an RRSP, you can choose from a wide range of financial institutions and investment options.
  • You can open as many RRSPs as you want.
  • The savings accumulated can be used for purposes other than retirement. You can withdraw from your RRSP in the case of a job loss or other unforeseen events. But remember that it is best to make your RRSP withdrawals when your income is low. Otherwise, you will not optimize your tax deferrals.
  • The savings accumulated are available at any time. However, when you retire, the funds are immediately taxed at source, and some service charges may be applied by your financial institution.
  • It is possible to increase your RRSP contributions by using your lifetime RRSP overcontribution of up to $2000 without penalty. Any amount exceeding this maximum contribution limit will be subject to a 1% per month tax until it is withdrawn from your RRSP.
  • You can contribute to your RRSP until December 31 of the year you turn 71.
  • In 2005, the foreign investment content limit of 30% was eliminated.
  • Contributing to a tax-free savings account (TFSA) can be a good way to diversify your portfolio and complement your RRSP contributions.

Contributing to your spouse's RRSP

  • You can contribute to your spouse's RRSP in order to maximize your tax deductions.
  • The amount you contribute to your spouse's RRSP cannot exceed your personal deduction limit.
  • You can contribute to your RRSP, your spouse's RRSP, or both, as long as you do not exceed your personal deduction limit.
  • Contributions you make to your spouse's RRSP do not reduce your spouse's own deduction limit.
  • If within 3 years your spouse withdraws the contributions you have made to the RRSP, the amount withdrawn will be added to your taxable income. After 3 years, that is, 2 complete calendar years or 3 "December 31sts", your spouse is the one who will be taxed on the withdrawals. For example, if you contribute to your spouse's RRSP on December 20, 2010, the three-year period ends in January 2013.
  • You can contribute to your spouse's RRSP until he or she turns 71.

What happens to your RRSP when you turn 71?

  • You will have to convert your RRSP investments before December 31 of the year you turn 71. Three options are available to you:
    • transfer to a registered retirement income fund (RRIF)
    • purchase of an annuity
    • cash reimbursement

Group RRSP

A group RRSP is a retirement savings mechanism generally offered by employers to their employees:

  • A group RRSP is essentially a collection of individual RRSPs, since an individual contract is registered for each participating employee. Certain eligibility and withdrawal conditions may apply.
  • Contributions can be deducted directly from the employee's salary, before tax. The employee can also make cash contributions at any time during the year.
  • From a fiscal standpoint, only employees can contribute to group RRSPs, which are subject to the same rules as individual RRSPs and provide the same tax savings. As an added benefit, these savings can be paid back on each pay cheque instead of once a year with your income tax return. An automatic weekly contribution of $25 per pay could provide up to $12.06 in tax savings, depending on taxable income, and net disbursements varying from $12.94 to $25.
  • If you have both a group RRSP and an individual RRSP, the sum of your contributions cannot exceed the deduction limit indicated on your most recent notice of assessment from the CRA.

Self-directed RRSPs

An RRSP is self-directed if you create and manage your own portfolio, with or without the assistance of a broker.

  • Investment options are not limited to the financial institution where you open your self-directed RRSP.
  • If you wish to invest your RRSP contributions in the stock market, for example, instead of a mutual fund, you must have a self-directed RRSP.
  • If you wish to invest your RRSP contributions solely in term deposits or mutual funds, a self-directed RRSP might not be the best product for you given the administration fees involved.
  • Self-directed RRSPs are subject to the same fiscal rules as the other types of RRSPs.
  • Self-directed RRSPs are not suited to everyone. They are intended mainly for people who have accumulated considerable savings in their RRSPs and want to further diversify their investments with the assistance of an investment expert.
  • Self-directed RRSPs offer greater investment options than conventional RRSPs.
  • In a self-directed RRSP, you can consult a broker for recommendations on the financial products best suited to your needs and investment profile. Your broker must respect the contract created with you.
  • Self-directed RRSPs entail annual administration fees that can amount to hundreds of dollars. From a fiscal standpoint, these fees are not considered eligible expenses incurred for the purpose of earning investment income.
  • Self-directed RRSPs require care and monitoring. It is best to verify investment eligibility, since the total real market value at the time of purchase could be added to your annual income.

Discretionary Management

With discretionary management, high-investing individuals can entrust their portfolios to investment specialists for an annual administration fee, either at a fixed rate or calculated as a percentage of the portfolio value.

The RRSP Statement

You may receive RRSP statements at different frequencies depending on the financial institution. However, all financial institutions must provide you with information on the status of your RRSP at least once a year.

An RRSP statement generally contains the following information:

  • Your last name, first name, address and client number
  • The statement date
  • The code of the branch you deal with
  • An account summary including the name and number of the plan, the cash value, the value of guaranteed investments and securities, and the total value
  • The details of each investment (description, issue date, maturity date, interest rates, etc.)

This text is intended exclusively to provide general information on financial security at retirement. This information may not be appropriate to the reader who wishes to obtain particular information on one of the treated subjects and cannot be a guarantee for results. It is up to the reader to make pertinent expert advice requests. This information capsule does not bind partner providers of these information.

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