Have an RRSP? Want to get one? Here’s 7 things you should know
The good ol’ Registered Retirement Savings Plan. A.k.a the RRSP. It’s as Canadian as a Timbit, but have you ever wondered what people are talking about when they drop this four-letter acronym? Nodded your head like “Yep, I sure know what those are…” when secretly you still weren’t sure what all the fuss was about? Well, we’re happy loop you in. Most people love RRSPs because they can save for the future, reduce their annual taxable income while they do it, and get some help along the way from the federal government.
So whether you have one setup, or are thinking about opening one, here’s 7 things to know about RRSPs:
1.Beat the deadline:
You can contribute to your RRSP every year, but there’s a deadline you need to meet. For the 2019 tax year, the deadline is March 2nd, 2020. The money you put in will be deducted from your overall taxable income from that year, so make sure you contribute on time.
2.Know your limit:
You can’t stack your RRSP full of cash in hopes that all of your dollars would be matched. Your contribution limit is based on a number of things including your earned income for the past year, and any unused contribution room from previous years (the government sets these limits). Check your Notice of Assessment from last year to see how much contribution room you have. You can exceed your RRSP contribution limit by up to $2,000 without being subject to a penalty.
If you or your spouse happens to be in a higher tax bracket than the other, you might consider income-splitting, by contributing to a spousal RRSP. Contributing spouses are limited to their own personal deduction limits.
4.Check your contribution room:
RRSP contributions can be carried forward if you think you might be in a higher tax bracket in future years. This will help maximize the tax deduction and reduce your tax bill later on.
5.Withdrawals are considered income:
Our changing economy has some Canadians turning to their RRSPs as a source of funds. Money withdrawn from an RRSP is considered income in the tax year it was received, so you’ll have to add it to the other income you earned during the year on your return. Depending on the amount, 10-30% of an RRSP withdrawal is taxed at the source, but that’s usually not enough to cover the total tax you would owe when it’s declared as part of your income, so keep a few extra dollars handy to cover this, should it arise.
6.Make withdrawals without penalties:
The Home Buyers Plan (HBP) and Lifelong Learning Program (LLP) do allow you to withdraw funds from your RRSP without penalties, as long as they’re paid back within deadline you’re given. If the funds aren’t repaid, they’ll be considered income.
If you turn 71 in the current year, you must convert your RRSPs into a form of retirement income before the end of this year or be taxed on the Fair Market Value of the plan.
Thinking you might not have enough saved to put money away this year? RRSPs have no minimum contribution, and every little bit helps. From reducing your overall taxable income to planning for retirement, RRSPs are a great way to start saving.
Have more questions about RRSPs? Come in and chat with a Tax Expert at an office near you. Ready to file? Do it yourself with our free online software.