A Registered Retirement Savings Plan (RRSP) is a useful financial tool to help Canadians save for their future. Many Canadians will open an account through their bank, a credit union, trust, insurance company, or may contribute to an RRSP through their employer and their chosen financial institution. Yet, there is still a lot of confusion around RRSPs and how they work. Some may even confuse their RRSP with a TFSA. Without a proper understanding of the financial products, account holders may lose out on the benefits they offer.
To clear things up, we’ve listed answers to fundamental RRSP questions so you can get the most out of your investment.
- When can you start contributing to an RRSP?
- Is there more than one type of RRSP?
- What is an RRSP deduction limit?
- What is the RRSP contribution room for 2020?
- What if you over contribute to your RRSP?
- Can you transfer your RRSP?
- How do you make an RRSP withdrawal?
When Can You Start Contributing to an RRSP?
Canadians can start contributing to an RRSP as soon as they generate some contribution room. They can do so by filling a tax return.
Is There More than One Type of RRSP?
There are three main types of RRSP that a person can have. Generally, a financial institution manages an RRSP, although a financially savvy person may want to set up a self-directed RRSP. This option allows the account holder to manage the investments within their portfolio.
- Individual RRSP: This type of RRSP benefits an individual, and their name is the only one associated with the account.
- Spousal or common-law partner RRSP: A spousal or common-law partnership RRSP can ensure a more evenly split retirement income for a pair. Experts recommend the higher-income spouse or partner contributes to receive the short-term benefits (tax deduction). The lower-income spouse would benefit more during the retirement phase.
- Group RRSP: RRSP contributions are automatically deducted from an employee’s pay and possibly matched by the employer. Each group RRSP has its own set of rules, although regular contribution limits still apply.
You aren’t limited to having just one of these accounts. If you switch jobs, for example, you may end up with multiple group RRSPs. You may have an individual and a spousal or common-law partner RRSP. As long as you don’t reach the maximum contribution limit across all accounts, you won’t face penalties.
What Is an RRSP Deduction Limit?
The RRSP deduction limit is a set number by the Canada Revenue Agency (CRA), though this exact figure does not apply to everyone.
RRSP Annual Deduction Limit
|Year||RRSP Dollar Limit|
*Data from the Canada Revenue Agency.
For 2020, the deduction limit is $27,230 or 18% of your pre-tax income from the previous year, whichever is less.
What Is the RRSP Contribution Room for 2020?
The contribution room is the total amount of money an individual can contribute to their RRSP in a given year. Each person’s limit is unique, so the best way to find the number is to look at your notice of assessment or notice of reassessment. You typically receive these documents after filing your taxes.
If you can’t find the number, the contribution room is a calculation of the current year’s deduction limit and any unused contribution room you may have.
Your RRSP is tax-deductible. So, by contributing, you can help lower your income tax at the end of the year. Depending on how much income you contribute, you may fall into a lower tax bracket. Here are the tax brackets for 2020.
2020 Federal Tax Rates
|Annual taxable income||Federal tax rate (%)|
|$0.00 to $48,535.00||15%|
|$48,535.01 to $97,069.00||20.5%|
|$97,069.01 to $150,473.00||26%|
|$150,473.01 to $214,368.00||29%|
|$214,368.01 and over||33%|
*Data from the Canada Revenue Agency.
What If You Over Contribute to Your RRSP?
If you contribute more than your deduction limit, you will be taxed 1% per month that your contributions are at least $2,000 over the limit.
However, you have a few options:
- Withdrawal the amount that is over the limit (you will pay taxes on this amount)
- Contribute to an eligible group plan
Can You Transfer Your RRSP?
You can transfer your RRSP from one bank to another, but there may be some fees. These transfers don’t incur tax and won’t count as a withdrawal. That means it won’t affect your contributions.
How Do You Make an RRSP Withdrawal?
Many companies offer their employees the opportunity to contribute to an RRSP through work, much like a pension plan. However, today it is more common to switch jobs, or even careers, multiple times throughout the working years. Which means, many Canadians will end up moving their RRSP savings as they part ways from their previous employers. These RRSP savings will need to be moved to a personal RRSP account and are subject to government rules, which usually prevent you from cashing them in before you turn 71.
For this reason, RRSPs transferred from previous employers are called locked-in RRSPs and require a special account. To facilitate this, the individual will need to open a locked-in retirement account (LIRA) or a locked-in registered retirement savings plan (lock-in RRSP), to ensure the funds are accounted for correctly.
RRSPs that are locked-in won’t be accessible until you hit retirement age. Funds that are not locked-in can be accessed whenever. Although, when you withdraw from your RRSP, you will be taxed in that year.
There is another condition. Canadians are only eligible to contribute to an RRSP until December 31st of the year they turn 71. At that point, account holders must choose from one of the following options:
- Transfer to a registered retirement income fund (RRIF)
- Purchase an annuity
- Receive commutation payments
- Withdraw the funds
Some conditions may apply to spousal or common-law partnership RRSPs.