RRSP Tips
#1: What is an RRSP?
A Registered Retired Savings Plan is a government approved plan to encourage you to save money for your retirement years.
Within your personal limit, your contributions are tax deductible. You can have any number of RRSPs.
Not only do you invest some money that would otherwise be paid in income tax, but the biggest advantage is that the earnings of an RRSP are not taxed until withdrawn.
This allows 100% of the earnings to be reinvested and compounded. This greatly increases the growth in value of your RRSP.
Ideally, you make RRSP deductions in your highest income years, and get the funds out at a lower tax rate in retirement.
#2: Who is eligible to contribute to RRSPs?
Anyone with "earned income" subject to Canadian taxation, including non-residents, may contribute to an RRSP.
You can make part or all of any RRSP contributions to a plan in your spouse's name. You, as the contributor, are still entitled to the tax deduction.
For this purpose, a spouse must be of the opposite sex, and either a legal spouse, or a common-law spouse with whom you have co-habitated for the last 12 months.
To maximize your long-term tax savings, RRSP contributions should always go into the name of the spouse who will otherwise have the lower income in retirement.
#3: Where can an individual get an RRSP?
RRSPs are available from banks, trust companies, credit unions, life insurance companies, investment dealers and mutual funds.
You can have any number of RRSPs. There are three basic types: deposit type plans, mutual funds, and self-directed plans.
Look for the plan that has the best potential return for the risk you are prepared to take.
Determine if there are any fees, and take them into account in comparing the anticipated annual growth.
A chartered accountant can advise you on the tax advantages of an RRSP and the type of plan most suitable for you.
#4: Earned income and your RRSP
Your maximum RRSP deduction is based on your earned income in the previous year and unused contribution room from prior years.
What is considered earned income?
Common forms of earned income include income from employment, from your unincorporated business, and net rental income.
Losses from these sources reduce earned income.
Your earned income is increased by any taxable alimony or maintenance you receive and reduced by any deductible alimony or maintenance you pay during the year.
Earned income does not include investment income (e.g., capital gains, interest and dividends) or retirement income (e.g., RRIF income, old age security and Canada Pension), except certain disability pensions.
#5: When should you make your RRSP contributions?
You can make an RRSP contribution at any time during the year.
Contributions during the first 60 days of a year can be deducted for the prior year or the current year.
A single contribution can be split between the two years.
The best policy is to contribute at the beginning of the calendar year, which will maximize the compounding of the earnings within the RRSP.
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