RRSP Frequently Asked Questions
Early Investment
When you start investing at an early age, you maximize the benefit of time and compounding interest. The longer you wait, the more you have to invest to reach a similar goal.
(This graph is used to illustrate the effects of compound growth and is not intended to reflect future values of mutual funds or other investments.)
What is an RRSP?
An RRSP, or Registered Retirement Savings Plan is a government approved plan in which you save money for your retirement. Your contributions, within limits, are tax deductible, and the income earned is tax sheltered.
Who can contribute to an RRSP?
Anyone that has an "earned income" subject to Canadian taxation, including non residents, can contribute to an RRSP. Even if you are not taxable, you should file a tax return to report your earned income and create RRSP deduction room.
You can make part or all of any contribution to a plan in your spouse's or common-law partner's name. You, as the contributor, are still entitled to the tax deduction. Contributions can be made until the end of the year in which the plan holder's 69th birthday occurs. An over-contribution can be carried forward beyond this year and deducted in subsequent years providing you have earned income on which to base the deduction.
Definitions of Spouse/Common-law Partner
The term "common-law partner" is defined as two persons, regardless of sex, who have cohabited in a conjugal relationship, normally for a continuous period of at least 12 months. This period can be less than 12 months if both spouses are the natural or adoptive parents of the same child, or if your partner has a child who is wholly dependent on you for support and over whom you have custody. The common-law partner definition applies until the cohabitation has ceased for 90 days.
As of 2001 the term "spouse" applies only to a person of the opposites sex who is a party to a legal marriage.
What is the Contribution Deadline?
You may contribute any time during the year.
Contributions made during the first 60 days of any year may be deducted for the current or the immediately preceding taxation year.
Can I borrow for an RRSP?
Yes, but you can't deduct interest on money you borrow to contribute to an RRSP. You should not use an RRSP as security for a loan. If you do, you could be taxed on the value of the plan.
How safe are RRSP investments?
Ask about deposit insurance protection before you invest in any RRSP.
There is no insurance on mutual funds, nor on is there insurance on most investments commonly held in self-directed RRSPs.
What types of RRSPs are available?
3 basic types available:
Deposit type plans:
The Deposit Type plan is the most common, offering savings options including saving accounts, term deposits or GIC's (guaranteed investment certificates). The rate of interest can be variable, fixed, or index-linked.
Mutual Funds:
Common types of mutual funds are money market funds, income funds and equity funds. Since mutual funds do and will fluctuate in value, they don't provide a guaranteed rate of return. Mutual funds are not covered by deposit insurance.
Self-Directed Plans:
These plans allow you to make all your own investment decisions within a wide range of qualified investments. A trustee does all the administration work for you. A self-directed plan may be uneconomical for those with limited RRSP funds, because of the normal administration and transaction fee.
What should you look for in an RRSP?
Look for the plan that has the best potential return for the risk you are prepared to take.
If there are fees involved, take them into account in comparing the anticipated annual growth. Remember, a front-end load reduces the amount invested. If for any reason you prefer a short term investment, make sure that your plan can be terminated quickly and at little or no cost.
To compare the earnings on guaranteed type RRSPs, don't look just at interest rates. Ask for the net annual yield. The more you know about your RRSP before you invest, the better.
Can you withdraw funds?
Funds in most RRSPs can be withdrawn in whole or in part, dependi ng on the original conditions at the time the plan was established. The money you withdraw is taxable and will be reported on a T4RSP by the issuer of the plan.
Can you leave funds in an RRSP indefinitely?
No, you must either purchase a retirement income option or withdraw your funds before the end of the calendar year in which you reach age 69.
What happens if you die?
If your spouse is the beneficiary of your RRSP, or inherits these amounts under your will, the proceeds can be transferred to an RRSP, RRIF or annuity for your spouse. He or she will not have to pay tax on the funds until they are withdrawn. If your spouse is over age 69, he or she can use all or part of the funds to purchase a retirement income option. (i.e. RIFF)
If your beneficiary is a child or grandchild who was financially dependent on you, there are a number of options available for continued tax sheltering - contact your personal banker for more details.
In all other circumstances, your RRSP funds are taxed on your final tax return. The result is the same as if you had withdrawn your RRSP immediately before your death.
The Home Buyers' Plan
Each eligible RRSP holder can withdraw, without immediate taxation,up to $20,000 to be used as part of a down payment for a qualifying residence. Income tax will not be paid on any portion of the withdrawal repaid to an RRSP before or during the 15 year repayment period. The repayments will not be tax deductible.
Spousal RRSP
You can make part or all of any contribution to a plan in your spouse's name. You, as the contributor, are still entitled to the tax deduction. For a "spousal contribution", you are known as the "contributor" and your spouse is the "owner" or "planholder".