RRSP – Registered Retirement Savings Plan

RRSP – Registered Retirement Savings Plan

The RRSP or more commonly referred RSP (Retirement Savings Plan) these days, was introduced in 1965. The purpose was to create a account for retirement. ( TFSA wasn’t around until 2009) RRSP’s can hold various types of investments  including gics, stocks, mutual funds, savings accounts, foreign investments, bonds and income trusts.

Start to Finish of A RRSP

You can start depositing to a rrsp account as soon as you earn a income and report it to the Canada Revenue Agency. You can contribute to your RRSP until December 31st of the year you turn 71. At that time you must convert your rrsp to a RRIF (Registered Retirement Income Fund)

Contributions

You can contribute up to 18% of your earned income each year, up to your annual limit. Canadian’s generally have a lot of remaining contribution room from previous year’s and that can be contributed as well if you get a nice lump sum of money. (We are currently thinking of refinancing our mortgage to take advantage of this) To find out your total limit to contribute check out your Notice of Assessment on the Canada Revenue Agency’s website.

The deadline to contributing to the previous tax year is March 2nd. Ie for 2019 taxes you can contribute until March 2nd 2020.

Canada has 5 different Federal personal income tax brackets (2021 Rates)

• first $49,020                                                  15%
• over $49,020 up to $98,040                             20.5%
  
• above $98,040 up to $151,978                         26%
  
• over $151,978 up to $216,511                          29%
  
• in excess of $216,511                                     33%
  

Source – Canada Revenue Agency

We also have Provincial Taxes on Top Too

Each provinces rates are different. Check Your provincial rates here

I’ll use Ontario’s 2020 tax rates as a example, since I live here

• 5.05% on the first $45,142 of taxable income plus
• 9.15% on the next $45,145, plus
• 11.16% on the next $59,713, plus
• 12.16% on the next $70,000,
• 13.16 % on the amount over $220,000

Add these percentages to your federal rate to come up with your total taxable percentage.

Lets do an Example. Say you live in Ontario and you make $90,000 a year. You are in the 20.5 federal rate and the 11.16% provincial rate. Bringing your current tax rate to 31.66%. So if you contributed $15,000 to your rrsp this year, you would get $4,749 back when filing your 2017 tax return. There are a bunch of tax calculators out there, play around with them.

It would be a good idea for the person in the highest tax bracket to max out their RRSP before contributing to your spouse’s. If you have some work rrsp match or anything definitely do that. Free money always wins. If your in the bottom tax bracket it’s probably a good idea to max your tfsa first, because you will be in the same tax bracket come retirement and now all the money you made on your investment is getting taxed as well. Also if you feel you will be moving up in tax brackets soon maybe wait until that promotion to receive more taxes back come tax time.

Spousal RRSP’s

Spousal RRSPs were designed so that incomes could be split in households where one party earns significantly more than the other, reducing the overall income tax bill. The higher income partner contributes to the spouse’s RRSP, and later, when that spouse withdraws income – as long as certain waiting-period rules are met – that cash is attributable to the lower earning spouse, who is likely in a lower tax bracket.

Withdrawals

Generally speaking I wouldn’t withdrawal any money from a RRSP before retirement, You will have to pay income taxes on those funds. (at your current rate) You will also permanently lose that contribution room you used to make that contribution. There are 2 times where you could definitely could though.

First Time Home Buyers Plan

We personally did this, RRSP holders can use the First Time Home Buyers’ Plan, which allows for a maximum of $25,000 to be withdrawn tax free, with 15 years to repay it back into the RRSP

or the

Lifelong Learning Plan

Those going to school can take out $10,000 tax free per year over two years as part of the Lifelong Learning Plan, with 10 years to pay it back.

Differences Between a TFSA and RRSP

The main difference between a Tfsa and Rrsp is the Tfsa contributions are made from already taxed money, and you can withdraw from your tfsa at any time. All the income gained in a tfsa is tax free.

While the RRSP credits the taxes paid on every dollar you contribute to an eligible RRSP account back come tax time. One big advantage over the TFSA is foreign dividends don’t get a withholding tax on them.

All the money made in the RRSP grows tax free until you start withdrawing your money. At that time you will be taxed at your current tax rate. Generally speaking you should have a lower tax rate because you are no longer working. If you plan to be making more money in retirement than you currently do (ie Real estate Empire) the tfsa would be a better retirement account for you.

Conclusion

The Retirement Savings Plan is just another great tool the government has created to promote saving for the future. I think if you use the RRSP and TFSA together you will have a fantastic financial future!

What do you max out first? The tfsa or RRSP. That’s a hard question and only you can decide that. What will your future retirement look like?

Personally we have decided to focus on the rrsp at the moment. It would be great to diversify our portfolio more and the US market has a lot more options out there than here in Canada. The money back at tax time would probably be contributed to our tfsa account.

cheers!

If You have any questions feel free to ask