RRSPs

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What is an RRSP (Registered Retirement Savings Plan)?

Simply put, an RRSP allows investors to make tax-deferred contributions towards their retirement savings. The benefit to doing this is being able to defer tax payments until retirement - the savings can be substantial. At retirement, it is more than likely you will be in a lower tax bracket. The benefit is further enhanced by the savings being in today's dollars. Essentially, it acts as an umbrella under which you are able to invest. Below are answers to some Frequently Asked Questions pertaining to RRSPs. For more detailed information and information on RRIFs (Registered Retirement Income Funds) and Locked-In Plans, please Contact Us.

How much can I contribute?

You can contribute a maximum of 18% of your earned income (up to a maximum of $16,500 in 2005 and $18,000 in 2006) unless you have carry forward room from previous years, in which case you are able to contribute more. Please note if you are a member of a RPP (Registered Pension Plan), MPPP (Money Purchase Pension Plan), or DPSP (Deferred Profit Sharing Plan), your RRSP limit may be lower.

What is my earned income?

Your “earned income” includes...

• Earnings from employment
• Net income you earned from any business carried on alone or with a partner
• Disability benefits received from the Quebec or Canada Pension Plans
• Net rental income received
• Alimony or maintenance payments received
• Net research grants
• Employment insurance benefits received during the year (does not include EI)
 

How does this benefit me tax-wise?

Example: If the investor's current average tax bracket is 35% and the RRSP contribution is $1000 – the savings is $350 in today's dollars. At retirement, if the same person's tax bracket is now 20%, they are taxed $200 at that period of time. The savings is $150 of today's dollars and can be further enhanced if that tax savings is used to pay down debt.

When is the contribution deadline?

For the Canadian tax year, the deadline for contributions is the 60th day of the following year. For those turning 69, the contribution must be made in the year in which they turn 69. This rule is not applicable for spousal RRSPs. For more information on spousal RRSPs, please Contact Us.

Can I remove the spousal designation on my RRSP upon death of my spouse / common-law partner or marital breakdown?

On death of the contributor, the name and Social Insurance Number of the contributing spouse or common-law partner may be removed from the plan on receipt of the contributor’s death certificate and a letter of direction from the annuitant requesting removal of the information. With the exception of death of the contributor, once an RRSP or RRIF becomes spousal, it stays spousal.

Can I withdraw money from my RRSP before retirement?

Yes, but if you plan to make a partial or full withdrawal from your RRSP, be aware of the tax consequences. All financial institutions are required by the CRA (Canada Revenue Agency) to charge applicable withholding taxes. Depending on your tax situation once your taxes are filed, you may either be required to pay more or you may receive some/all back. Below are the required withholding amounts per withdrawal.

• Up to $5000 – 10%
• Between $5001 and $15000 – 20%
• Over $15001 – 30%

There are exceptions to the withholding tax. These taxes may be waived if the applicant is applying for the HBP (Home Buyer's Plan) or the LLP (Lifelong Learning Plan). Please Contact Us for further information on these programs.

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