January 6, 2019
What is an RRSP?
What is an RRSP?
RRSP stands for Registered Retirement Savings Plan, meaning it is registered with the CRA. RRSP accounts are offered by banks and other institutions. You or your spouse can make contributions to this savings plan which are tax deductible! Your taxable annual income is directly reduced by the amount that you contribute to your RRSP (meaning $1 contribution means -$1 taxable income).
How does my RRSP earn money?
An RRSP earns interest just like any other savings account. The income you earn in the RRSP is usually exempt from tax as long as you don’t withdraw the funds. When you withdraw the funds in retirement (or earlier) you will have to pay tax on the income at that point.
What is my RRSP deduction limit?
You can find your RRSP deduction limit for the current year on your last Notice of Assessment, or you can call the CRA Tax Information Phone Service (TIPS) at 1-800-267-6999. This limit is the maximum that you can contribute to an RRSP account without being penalized – yes, there are penalties for over-contributing! The limit is based on a percentage of your income so it will continue to increase as you earn active income over the years. Active income does not include rental or investment income.
What is a spousal RRSP?
If you choose, you can set up an RRSP account in your spouse’s name that you contribute to. This is advantageous if one person in the relationship earns a substantially higher income than the other. You, being the high-income spouse, make contributions to your spouse’s plan and you have the benefit of a tax deduction on your current income. This will reduce the tax you have to pay today on your high income. Your low-income spouse is more likely to be in a lower tax bracket in retirement, when he or she receives the income and is responsible for the income tax at that point. An important thing to note is that you are still limited by your own RRSP deduction limit. This is often referred to as “contribution room”. You are not able to use your spouse’s contribution room for the spousal RRSP. They must contribute to their own RRSP to use their RRSP deduction limit.
When should I withdraw from my RRSP?
Generally, you should leave the money in your RRSP until you retire. However, as long as your RRSP account is not locked in, you can withdraw the funds at any time, you will just have to pay the tax on it. This may work out in your favour if you need to pull out funds in a low income year, for example, if you are not able to work because of an injury or you had high moving expenses or a self-employed business loss. By withdrawing the funds in a low income year you may end up paying less tax overall than you would have if you had not contributed to an RRSP. A word of caution though – withdrawing from an RRSP does not “free up” contribution room. Your RRSP deduction limit will not increase again now that you have withdrawn funds. For this reason, we recommend avoiding using the funds in your RRSP unless you really need to.
What is the Home Buyers Plan?
The Home Buyers’ Plan (HBP) allows you to withdraw up to $25,000 in a calendar year from your RRSPs without paying tax on the withdrawal to buy or build a qualifying home for yourself or for a related person with a disability.
To qualify for yourself, you must:
- Be considered a first-time home buyer. (Note that this has a 4 year time period so you may qualify if you have owned a home in the past but have now been renting for 4 years!)
- Have a written agreement to buy or build a qualifying home for yourself.
You must repay the amount you withdrew from your RRSP in annual installments over 15 years to avoid paying tax on the withdrawal.
What is the Lifelong Learning Plan?
The Lifelong Learning Plan (LLP) allows you to withdraw amounts from your RRSPs to finance full-time training or education for you or your spouse. The maximum you can withdraw is up to $10,000 in a calendar year and up to $20,000 in total. The repayment period is 10 years and so 1/10 of the total amount you withdrew must be repaid annually. If you do not make the minimum repayments, that amount will be included as taxable income for you in the year.