RRSP Contribution Rules
Registered Retirement Savings Plan (RRSP) are popular in Canada, and it is crunch time for Canadians with RRSP deadlines looming at the end of the month.
According to the Government Of Canada, the Registered Retirement Savings Plan (RRSP) is a personal savings plan that is registered with the Federal Government which allows you to save for your retirement. The RRSP was first introduced in 1957.
RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.
As a result, at tax time, you will get a tax-relief because your taxes are computed on your gross income less your contributions, resulting in lower income taxes.
Returns earned on your RRSP investments are tax-sheltered and will not be taxed until you start to withdraw in retirement.
RRSP Contribution Limits
There are limits to the contributions you can make to your RRSP. On an annual basis, Canada Revenue Agency (CRA), stipulate the maximum amount that can be contributed.
For 2017 is 18% of earned income from 2016 up to a maximum contribution amount of $26,010 minus any pension adjustments from a employer-sponsored pension plan.
Any unused RRSP contribution room from previous years can be carried forward from year to year until age 71. The RRSP contribution room you have for the current year can be confirmed by checking the Notice of Assessment or Reassessment received from CRA for last year’s taxes.
Contribution limits are calculated at 18% of the prior year’s reported earned income (from employment or self-employment), up to a maximum. The maximum has been rising as shown in the table below. Since 2010 it is indexed to the annual increase in the average wage.
2010 $22,000 2015 $24,930
2011 $22,450 2016 $25,370
2012 $22,970 2017 $ 26,010
2013 $23,820 2018 $26,230
2014 $24,270 2019 $26,500
Deadline for RRSP Contribution
Contribution can be made to an RRSP at any time. If you want to claim your tax break when filing your taxes, then you must have put in the contribution no later than 60 days after the end of the tax year, unlike TFSA Contribution Rules which cut off at the calendar year end.
There are four types of RRSP
According to Wikipedia there are 4 types of RRSP:
Individual RRSP: an Individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
Spousal RRSP: a Spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse’s name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
Group RRSP: in a Group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced.
Pooled RRSP: legislation was introduced during the 41st Canadian Parliament in 2011 to create Pooled Retirement Pension Plans (PRPP). PRPPs would be aimed at employees and employers in small businesses, and at self-employed people.
A Few Things to Be Aware Of
While the government charges a tax penalty to withdraw funds early (10% to 30% adjusted when you file your taxes), they do make exceptions if you’re using it to buy a house or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchase loans. Also, the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity.
Don’t wait for retirement to enjoy life !!