Registered Retirement Savings Plan (RRSP)

Home » Registered Retirement Savings Plans

What Is a Registered Retirement Savings Plan (RRSP)
in Canada?

An RRSP, or Registered Retirement Savings Plan, is a savings plan to which you (along with your spouse or common-law partner) can make contributions. Contributing to an RRSP allows you to deduct these contributions from your taxable income, effectively reducing your tax bracket for the current year. RRSPs are regarded as investments for your future retirement. It’s important to note that taxes are not avoided; rather, they are deferred until a later time.

Types of RRSPs

Individual

Spousal

Group

How do RRSPs operate in Canada?

It’s a tax-advantaged account, designed by the government of Canada to provide tax incentives to individuals who invest in RRSPs, encouraging them to save for retirement.

RRSPs operate on a tax-deferred basis, meaning that the money you contribute is exempt from CRA tax in the year of the deposit. Taxes are only incurred when you withdraw the funds in the future. RRSPs offer a beneficial way to reduce your current-year tax bill. However, it’s important to note that this is a tax deferral, and eventual tax payment is expected, ideally at a more tax-advantageous time in your life.

How to open an RRSP in Canada.

Simply connect with one of our Assurance Brokers Group Associates, and they will conduct a comprehensive financial assessment with you to determine your retirement needs and goals. The assessment typically takes between 20 minutes to an hour, representing a valuable investment of your time.

Benefits of a Registered Retirement Savings Plan or
RRSP?

Once you grasp how RRSPs operate within the framework of the Canadian Income Tax Act, you’ll recognize it as a significant tax benefit for the average Canadian. During retirement, Canadians typically have a lower income, placing them in a reduced tax bracket. This constitutes a primary advantage of RRSPs: you receive a tax refund when contributing, and upon retirement, when you withdraw the funds, you’ll be taxed less due to the lower bracket.

Think of it as an umbrella; as long as you’re under it, you won’t get wet. Similarly, with RRSPs, you aim for less “rain” (less tax) when you eventually withdraw the funds. Another noteworthy benefit is the ability to lower your taxes by claiming RRSP contributions on your tax return, and any earnings on your investment remain untaxed as long as they remain within your RRSP.

Approaching retirement, it’s advisable to take advantage of government programs allowing the direct transfer of RRSP savings into a Registered Retirement Income Fund. Additionally, contributing to a spousal RRSP is advantageous, especially if you earn more than your spouse. This not only boosts your spouse’s retirement savings but also reduces your own taxes, ensuring a more equitable distribution of retirement funds between you and your spouse.

Your RRSP provides you with the flexibility to utilize it for a down payment as a first-time home buyer when you’re ready to make a purchase, or for your own educational pursuits.

Benefits of working with an Assurance Brokers Group Associate

An associate from Assurance Brokers Group conducts a comprehensive needs analysis with their clients. Going above and beyond, we ensure that our clients are not only well-taken care of in terms of insurance and investments but also offer a range of interrelated products tied to financial planning. Our goal is to ensure that clients can leverage a well-rounded financial plan, maximizing the benefits across various aspects of their financial needs.

FAQ

Who introduced RRSPs?

The initial RRSP, originally known as a registered retirement annuity, was established by the Government of Canada in 1957. During that period, individuals could contribute up to 10 percent of their income, with a maximum limit of $2,500.

How much will an RRSP reduce your taxes?

The amount of your tax refund from an RRSP depends on your income bracket and the extent of your contributions. Your salary or earnings play a crucial role, and the more you invest in an RRSP, the lower your income taxes will be. Typically, individuals can expect to receive a tax refund ranging from 20% to 50% of their RRSP contribution, but this varies based on individual circumstances.

What happens to your RRSPs when you retire?

You can contribute to your RRSP until December 31 in the year you turn 71. Afterward, you must choose from the following scenarios:

A) Withdraw Cash from RRSPs

You have the option to withdraw a portion or the entirety of your funds from the RRSPs as cash. The amount withdrawn must be declared as income on your tax return for the given year, and a withholding tax would apply. It is not advisable to withdraw the entire amount at once, as this could push you into a higher tax bracket.

B) Convert Your RRSPs to a Retirement Income Fund (RRIF)

To mitigate the tax implications of a substantial cash withdrawal, many individuals convert their RRSPs and transfer assets into a RRIF. This conversion can be done at any time before December 31 of the year you turn 71.

C) Purchase an Annuity

An annuity is a product that can be acquired from an insurance company using funds from RRSPs or RRIFs. In exchange for a deposit, the insurance company provides periodic payments with interest for a defined period. Payment amounts are fixed, cannot be altered, and are received at regular intervals (monthly, quarterly, etc).

There are two types of annuities: term certain and life. A term certain annuity guarantees a set amount for a fixed term, extending from the time of purchase to the age of 90. If you were to pass away before the term ends, regular payments are made to your estate. A life annuity provides a regular amount for your remaining life and ceases at death, with no funds going to your estate.

What happens to your RRSP when you pass away?

Upon death, RRSPs are considered to have collapsed. The tax implications largely hinge on the designated beneficiary of the RRSPs. The general rule for RRSPs or a RRIF is that the value of the RRSPs or RRIF at the date of death is included in the income of the deceased for the tax returns in the year of their death. There are three exceptions to this rule where tax deferral is possible if the beneficiary of the RRSPs, RRIF, or estate falls into one of three categories: the spouse or common-law partner financially dependent children or grandchildren under 18 years of age financially dependent mentally or physically infirm children or grandchildren of any age

Can an RRSP be transferred to another person e.g. partner or child ?

In the event of a person’s demise, it is frequently feasible to transfer RRSPs to a beneficiary on a tax-deferred basis. If the beneficiary is a spouse, common-law partner, or a financially dependent child or grandchild with a mental or physical disability, the beneficiary can make a request for the assets to be rolled over to their own RRSPs or RRIFs.

Are RRSPs the best option for me?

It’s advisable to consult with an associate from Assurance Brokers Group for a comprehensive financial analysis to identify the optimal investment plan for you. Through this analysis, you’ll gain insights into aspects such as your contribution limit, tax benefits, taxable income, tax savings, deduction limit, capital gains, investment certificates, RRSP contribution limits, tax-free savings accounts, RRSP investments, tax advantages, and more. Rest assured, you’ll be in capable hands, well-prepared for a retirement that aligns with your goals.

Can I make a withdrawal from my RRSPs before I retire?

Indeed, you can access your RRSPs, but typically, taxes apply when you redeem, make withdrawals, or receive payments from the plan. In the case of locked-in RRSPs, withdrawals are generally not permitted. To ascertain whether your RRSPs are locked in, it is advisable to contact your issuer. If your RRSPs are not locked in, you have the flexibility to withdraw funds at any time. However, it’s essential to be mindful of the tax implications associated with such withdrawals.

What are my contribution limits on my RRSPs?

Your RRSP contribution room, often termed the “RRSP deduction limit,” allows the amount you deposit to be claimed as a deduction on your annual tax returns.

The annual contribution limit is tied to your income, with a maximum dollar amount. Any unused contribution room carries forward as a tax deduction to future years if you don’t reach the RRSP limit.

You can contribute up to 18% of your earned income from the previous tax year or the annual maximum dollar limit set by the Canada Revenue Agency (CRA). For the 2021 tax year, the maximum contribution limit is $27,830.