What are RRSPs? Your RRSP Questions Answered

RRSP season is now officially underway. The first two months of the year are usually when Canadians are scrambling to make an RRSP contribution so they can get a tax refund. If you have questions about RRSPs, keep reading.

What is an RRSP?

An RRSP is a tax-sheltered account you can use to save for retirement.

What are the benefits of an RRSP?

There are many benefits to having an RRSP, such as:

• You receive a tax deduction for the amount of money you contribute
• Your investments grow tax free, which helps your retirement savings grow faster
• When you make withdrawals during retirement, you’ll likely be in a lower tax bracket and therefore pay less tax
• You can use your RRSP to help make a down payment on a home or help pay for your education

Where do I get an RRSP?

You can set up an RRSP through a financial institution, such as a bank or credit union. You may also have access to an RRSP through work, which is called a group RRSP.

How much can I contribute to an RRSP?

The amount you’re allowed to contribute can be found on your latest notice of assessment or notice of reassessment from the Canada Revenue Agency. The limit is 18% of your previous year’s earned income minus the previous year’s pension adjustment (if you have one). The maximum contribution for the 2015 tax year is $24,930 but you need to have earned income of $138,500 in order to reach that limit.

What happens if I don’t max out my RRSP?

Since 1991, you’ve been able to carry forward any unused contribution room indefinitely.

Do all Canadians make a contribution to their RRSP?

About six million taxpayers or 23.4% of them contributed to an RRSP in 2013, according to the latest data available from Statistics Canada. The median contribution was $3,000, meaning half contributed more than $3,000 to their RRSP and the other half contributed less than than $3,000.

When can I make RRSP contributions?

You could have made RRSP contributions for the the 2015 tax year as early as Jan. 1, 2015. If you’ve managed to use up all of your RRSP contribution room, you can now start making contributions for the 2016 tax year.

What is the RRSP contribution deadline?

You have 60 days after the end of the previous year to make an RRSP contribution. Because 2016 is a leap year, the deadline for your 2015 tax year contribution is Feb. 29.

What kind of investments can I hold in an RRSP?

Like TFSAs, RRSPs can hold a variety of investments, including stocks, mutual funds, ETFs, and bonds. If you want to play it safe, you can also hold GICs or cash in a registered high-interest savings account.

Can I make tax-free withdrawals from an RRSP?

Withdrawals aren’t tax free unless you use the money to buy a home under the Home Buyers’ Plan (HBP) and you’re a first-time buyer, or to finance an education under the Lifelong Learning Plan (LLP). You can withdraw up to $25,000 from your RRSP for the HBP, and up to $10,000 in a calendar year and up to $20,000 in total for the LLP.

You have up to 15 years to make repayments to your RRSP when you withdraw money under the HBP and up to 10 years to make repayments under the LLP. You need to make equal instalment payments over the 15- or 10-year periods. If you fail to make repayments for either plan, you have to include the amount you didn’t pay as RRSP income on your tax return.

Can I have an RRSP when I retire?

You can keep RRSP until you turn 71. At that time, you can convert the RRSP into a registered retirement income fund (RRIF), use the funds to purchase an annuity, or do a combination of both. You can also withdraw some or all of your funds from your RRSP. You may only want to do this if you have no other income or are in a low tax bracket.

You should speak with a financial advisor when you’re near retirement to find out what’s best for your situation.

Have more questions about RRSPs? Let us know in the comments section below.

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