Registered Retirement Savings Plan (RRSP): A Complete Guide

Get answers to all your questions about Registered Retirement Savings Plan (RRSP), and make an informed decision for your financial future here.

Registered Retirement Savings Plan (RRSP): A Complete Guide

What is the advantage of an RRSP? Could you buy a house with RRSP in the US, Canada, or anywhere else?

A Registered Retirement Saving Plan is a great plan and the first stage of saving for our golden age. RRSP is an investment account that has significant tax benefits.

You must file taxes to claim your RRSP subsidy through free software or an accountant. The main goal is to protect some of your earnings from taxation fees.

What should you know about RRSP? Keep reading as we give you the full tour in our Registered Retirement Savings Plan guide. 

What Is an RRSP Contribution?

Contribution is the amount of cash you deposit through an RRSP. Your contributions will grow in time, and you can use them to invest in financial products. However, the Registered Retirement Savings Plan is not by itself an investment, and it’s only a type of account. 

You must choose how to invest your contributions in bonds, equities, or index funds. You are, in disposition, creating an investment portfolio to finance your retirement years. Your entire subsidy to an RRSP in any single year is subject to a limitation based on your last year’s earnings. 

So what is the limit of your contribution, and how will you invest it? Your account shows your eligible share contribution based on the previous year’s income. Also, you can find it on your Notice of Assessment.

The Various Types of RRSP

When you open an RRSP account, many choices are available. It all relies on your needs and purposes. For example, there are RRSPs you could open and handle yourself or share with a partner or spouse. 

Also, there’s an RRSP account opened with an employer’s contribution matching plan. Let’s have a look at each.

The Spousal RRSP

A spousal RRSP is a registered account in the name of your partner or spouse. Therefore, you could contribute to a spousal RRSP and claim a deduction. Nonetheless, your partner or spouse will keep the investments made. 

Only request your financial establishment to open a spousal RRSP and begin contributing. The purpose is to split earnings fifty-fifty into retirement. For example, if you have a higher income and your spouse isn’t, you can lower your tax duty by having a spousal RRSP contribution. 

If you’re both retired, your partner can withdraw the money and pay fewer taxes than you would. Here are some rules in case your partner or spouse withdraws funds before retirement.

You may need to pay tax on the amount of withdrawal if it’s still within three years of the contribution date. However, if it’s within three years after the contribution date, your partner will pay tax on the withdrawal amount.

The Individual RRSP

An individual RRSP registered account will be in your name. It’s an account you must make to start lowering your income tax while saving for retirement. Relying on your necessities, you could open a self-directed or a regular account.

Traditional financial organizations usually offer a regular RRSP account. However, your financial consultant may recommend portfolio investments like mutual funds. In addition, online brokers and traditional financial banks offer self-directed RRSP accounts. 

You can pick this kind of account if you like investing alone without needing a consultant. For this kind of account, it’s best to have proper knowledge of financial markets and investing principles.

However, many reputed advisors will create an investment portfolio for you. It’s also not unusual for investors to have self-directed and regular RRSPs.

The Group RRSPs

Employers offer Group RRSP to their workers as a feature of their benefits package. When your employer proposes a group RRSP, it’s vital to have it in your financial retirement planning. You may get an estimate of your retirement benefits through human resources advisor.

Deduction and Contribution Limits

The RRSP comes with many excellent benefits, but there is a limit to contributions and deductions each year. So, before we start, we must define an RRSP contribution and deduction limit. Though generally associated as similar, they are different. 

A deduction limit is the most significant amount you can deduct from your annual income. In contrast, the contribution limit is the amount you could deposit into your RRSP each year. 

As a general procedure, the allowed contribution for your calculated RRSP is the lesser of: 

  • The highest contribution limit for the existing year 
  • 18% of your accumulated income for the last year

The RRSP account contribution limit for the year 2022 is a max of $29,210. So, in different ways, the more increased your tax bracket, the more beneficial the RRSP is. Let’s see how this unfolds: 

When RRSP Is Over Contributed

The good news is that your unused RRSP contribution room can get rolled forward in the next year. So, if your contribution room is $9,000 and you contributed $4,000, you will have an extra $5,000 on top of your limit. As that may be helpful, particularly as you gain more income, you must also be alert to contributing to your RRSP. 

Not incurring tax, you could overcontribute up to $2,000. Anything beyond this amount would be subject to a 1% monthly tax. Due to an RRSP setup, if you want to withdraw the extra funds, they will become taxable income. 

Any amount of over contributions is not tax-deductible. So the benefit to others is the chance of having more funds growing on a tax-free basis. 

The Home Buyers Plan for RRSP

When you need to buy a house, you could leverage your RRSP account to help you make it. The Home Buyers Plan lets you withdraw an amount of $35,000 from your RRSP to buy or build your dream house. You can pay the amount withdrawn as a loan in less than 15 years. 

The advantage of withdrawing using the HBP, you don’t need to add the amount of withdrawal to your income. If married or have a common-law partner, you could access a total amount of up to $70,00. Before using this method to buy your home, you should stay notified of the rules and needs. 

Understanding the Benefits of RRSP

The RRSP is a practical financial medium to leverage for your future retirement. Know what RRSP contribution is and the different types mentioned above. Half the work is understanding, and the other is taking steps to build your future. 

Need help in investing in RRSP? Contact us now to get started on your insurance and mortgage quote!

Tim Belanger
About Tim Belanger

Tim Belanger is a local Ottawa Mortgage and Insurance broker that prioritizes you. No matter your lifestyle or budget there is a plan for you.