What is an RRSP and how do they work?
By Alterna Team
February 11, 2022

An RRSP, or Registered Retirement Savings Plan, is a personal investment that’s registered with the federal government. The idea behind RRSP’s is to encourage people to save money for their retirement by offering them tax breaks on the money they contribute and allowing the money invested to earn income (interest, dividends etc.) tax-free. There are some rules for contributing to an RRSP and understanding these will enable you to max out your retirement savings and avoid any surprise tax penalties.

Who can open an RRSP?

Any Canadian with employment income who files a tax return may set up and contribute to an RRSP.

How long can I maintain an RRSP?

The year you turn 71, you must close your RRSP. From there, you have a number of options for the money you have saved.

1.Convert the RRSP to a Registered Retirement Income Fund (RRIF).
2. Purchase an investment called an annuity using the funds from the RRSP.
3. Withdraw all the money in the account. This is also called “collapsing the account”. This option could have big tax implications as the whole amount of the RRSP would be taxable.

How much can I contribute to my RRSP?

You can contribute to your RRSP every year. How much you can contribute depends on your income.

You can find your annual contribution limit, also known as your “deduction limit,” at the bottom of your Notice of Assessment or Reassessment.

If you don’t contribute your maximum amount every year, the “leftover” space carries forward towards future years.

The CRA lets you know how much contribution space you have for the next year on your notice of assessment when you file your taxes.

Contributions must be made during the taxation year or within the first 60 calendar days of the following year to qualify for tax deductions for that year’s taxes. Details on specific dates for each calendar year can be found on the CRA website.

Tax deductions?

RRSP contributions are tax-deductible and may help to reduce the total amount of income tax you pay.
As mentioned above, you can carry forward unused contribution space. So, in years where you have a lower income, it may be beneficial to save your contribution space so that when your income has increased, you can use that space to decrease your taxable income.

Keep in mind that you will have to pay tax on the funds in your RRSP when you withdraw the money. Ideally, when you make withdrawals, it will support your retirement, and you will be in a lower tax bracket.

When can I withdraw my money?

If you withdraw money from an RRSP, you will pay income tax and withholding tax. Withholding tax is money held back by your financial institution- and delivered to the government. It is generally between 10-30% of the withdrawal amount.

There are two occasions when you can take money out of your RRSP tax-free before retirement:

  • Home Buyer’s Plan (HBP) allows you to take out $35,000 to make a down payment on your first home. However, the withdrawn amount must be repaid to your RRSP within 15 years to avoid tax implications, visit the HBP website for more details.
  • Lifelong Learning Plan allows you to take $20,000 throughout your life for training and education. You can withdraw up to $10,000 a year, but the money withdrawn must be paid back to your RRSP within ten years.

Can I name a beneficiary?

It’s a good idea to decide on one or more people who will receive the funds in your RRSP if you die. If you don’t specify a beneficiary, your money will form part of your estate and be divided accordingly.

If your spouse is named the beneficiary, the proceeds will be tax-sheltered as long as the funds are transferred to your spouse’s RRSP or RRIF.

If you name children or grandchildren as beneficiaries, tax is generally payable by the estate of the deceased. If the children or grandchildren are financially dependent minors, the tax can be deferred via transfer to an annuity. If the children or grandchildren are financially dependent due to physical or mental disability, the money could be transferred into an RRSP in their name.

What is the more effective approach to building my RRSP?

An RRSP can hold a wide range of investments, including stocks, bonds, GICs, and mutual funds.

An Alterna Wealth Advisor can help you decide the best types of investments for you and help you reach your retirement goals. Book an Appointment