What is a RRSP?
Question: What is the common term for someone who enjoys work and refuses to retire? Answer: Nuts!
If you’re looking for a good way to save for retirement, a Registered Retirement Savings Plan (RRSP) is a probably the best option out there. It will help reduce your taxes in your moneymaking years, which has the added bonus of encouraging you to save more.
Anyone who files a tax return can open an RRSP.
How do RRSPs work?
Since money you invest is tax-deductible, there are rules to how much you can contribute each year. The more money you earn, the more you can put away. If you want to find out how much you can contribute this year, take a look at your Notice of Assessment (the statement provided to you after you did your taxes) for the previous year.
Each time you contribute to your RRSP you get a receipt showing how much you contributed. If that money stays in your RRSP, you don’t pay income tax on that amount. You will, however, have to pay tax on money you take out of the plan.
The money you invest in RRSPs can be used to buy investments of all kinds. Money earned through interest on those investments can’t be taxed either – at least not until you take them out of the plan. You can access your RRSPs before they mature, but know that you will be taxed if you do. There are two situations where you can borrow money from your RRSP without penalty:
1. You can use up to $25,000 under the First Time Home Buyers Plan for just about anything as long as you qualify as a first time home buyer, visit the CRA website for more information.
2. You can use some of the money for education, but there are rules for how much you can take out each year.
What you need to know: If you choose to borrow money from your RRSP for education or a down payment, you will be responsible for paying it back in a certain amount of time.
What types of plans can I choose from?
Although you can only contribute a certain amount of money each year, there’s no limit to how many RRSP accounts you can open. Generally, there are four types of RRSPs you can choose from:
- A basic RRSP
- A group RRSP offered through your work
- A partner or spousal RRSP
- A self-directed RRSP
Since each account works slightly differently, make sure you ask questions about each before choosing one.
How much can I contribute each year?
Each year the government sends you a Notice of Assessment after you file your taxes. You are allowed to contribute 18% of last year’s income, although Pension plan members have lower limits since they’re already investing into a pension plan. You don’t have to claim your whole contribution each year – you can actually defer them to another year if you want to. This is especially helpful if you’re putting money towards retirement at an early age, but don’t make enough to use it as a tax-deduction.
Don’t forget: You’ll need receipts later when you want to claim a deduction on your income tax return; so don’t forget to ask for them each time you make a contribution.
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