The 2013 RSP deadline is over. If you took advantage of it, congratulations, if you missed it, there is always next year. If you did your RSP in the final hour, there are better ways. Keep reading. First some history.
The Registered Retirement Savings Plan (RRSP) was created by federal legislation in 1957 as an incentive for Canadians to save for their retirement income needs. Many changes have been made over the years, but the basic mechanics and strategies of RRSP’s are unchanged and remain quite simple.
Delaying taxes – Canada Revenue Agency (CRA) enforces the rules as to how much we can contribute to RRSPs. For the 2014 tax year, it’s 18% of 2013 income to a maximum of $24,270.00 plus any unused contribution room carried forward from previous years, minus any pension adjustments (if you happen to be apart of a pension plan). CRA reports to each tax payer the amount they can contribute to an RRSP on their Notice of Assessment a few weeks after filing a tax return. Deposits made to an RRSP within the above limits are considered deductible from income at your highest tax bracket. Some or all of your deductions can actually be carried forward to a future year when income is greater, thereby making the tax savings larger.
Income taxes on the RRSP deposit and growth are postponed until money is actually withdrawn. For example, John commits to saving $18,000 of his total income each year. If he contributes this amount to an RSP, because an RRSP deposit is tax deductible, the full amount can be invested on a before tax basis. If John were to deposit instead to a non-RRSP account,(after tax situation), he would only be able to invest $11,700 (assumes a 35% marginal tax bracket) which is what he would have left over after paying taxes. As taxes on growth are also postponed inside an RRSP, his $18,000 per year would grow to about $1,625,766 in 35 years at 5%. His non-RRSP account would only grow to about $861,731 over the same period because John’s growth will be taxed along the way.
Use an RRSP to Purchase a Home – Federal legislation allows qualifying home buyers to withdraw up to $25,000 per person of existing RRSP funds towards the purchase of a home under the Home Buyers Plan (HBP). Income tax will not be withheld on this withdrawal. In essence, this is a tax free loan from your own RRSP.
Over a period of up to 15 years, you have to repay to your RRSPs the amount you withdrew under the HBP. Generally, for each year of your repayment period, you have to repay 1/15 of the total amount you withdrew, until the full amount is repaid to your RRSPs. The repayment period starts the second year following the year of withdrawals and ends when the HBP balance is zero. If a repayment is missed in any year, regardless of previous payments, it will be considered a taxable RRSP withdrawal.
Contribute to a Payroll Deduction RRSP – Many forward thinking employers have set up Group RRSP plans for their employees. In some cases, the employer will match a certain portion of the employees deposits. If you have one available where you work, you should consider taking advantage of it.
They are convenient and effective. You choose an amount to be deposited to your RRSP per pay period and it’s automatic. That way, the money doesn’t have a chance to trickle through your fingers. A Group RRSP can provide an instant tax break. The deposit can be subtracted from income before taxes are calculated. Do you really want to wait for the CRA to send you a refund?
If your employer does not have a group RSP we can help you set up monthly contributions yourself on a before tax basis and accomplish the same thing. – M Dumond
Please contact our office for more information on how we can help you achieve your financial goals.