Registered Retirement Savings Plans (RRSPs) have evolved into the most popular savings vehicles in Canada since being introduced in 1957. It is important to be aware of the key features of RRSPs in order to maximize the benefits:
Income Tax Savings – First and foremost, it may go without saying that any contribution to RRSPs can result in an immediate tax savings. These deposits are deducted from the contributor’s income at the highest tax rate they must pay first.
Tax-Postponed Growth – Any growth than an RRSP earns does not attract income tax until it is actually withdrawn from the plan. This maximizes the benefit of compound interest.
Income Splitting – When income is taken from an RRSP after age 65, an election can be made on the tax returns of a married or common-law couple to split qualified income between them. This generally means a lower overall income tax bill, in many cases significantly lower.
Deferred Deduction – A contributor can choose to make a deposit to an RRSP but delay deducting all or part of it until a later tax year. This makes sense if income in a future year would put them into a higher tax bracket. In the case of someone who receives a financial windfall and has unused contribution room, a large deposit can be made initially and deductions from income only used to reduce their highest taxed income in several future years.
New Home Purchase – If certain conditions are met, funds can be withdrawn from an RRSP tax-free and used towards the purchase of a new home. The funds need to be paid back into an RRSP within fifteen years or they may become taxable.
Education Funding – The Lifelong Learning Plan (LLP) allows you to withdraw amounts from RRSPs to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children.
Instant Tax Break – If you are making regular contributions (say, monthly) to an RRSP, you can apply to the Canadian Revenue Agency (CRA) to get permission for your employer to deduct the RRSP contributions from your income before calculating the amounts that need to be withheld and remitted.
RRSP Loans – Many contributors borrow to invest in their RRSP close to the annual deadline. They then use their tax refund to reduce or pay-off the loan.
Name a Beneficiary – You can name a beneficiary and, in some cases, a secondary beneficiary for an RRSP on death. This means funds can be paid directly to that person or persons and avoid the delays and cost of being processed in your estate.
It is wise to work with someone experienced in the area of RRSPs and retirement planning to help set up and monitor your program. Avoid making RRSP decisions at the last minute because of the deadline. A well planned strategy can mean retirement comfort. -M Dumond