How to Prepare for RRSP SeasonBrian Jang ON February 9, 2020
It’s that time again!
RRSP season can sneak up on you quickly and take you unaware. Are you ready for RRSP season? You might be thinking of this as the time to scrape together every last cent and make your contribution, but what else do you know about RRSPs? Here are a few points to ponder:
What is an RRSP?
Let’s clear up the basics first: what exactly is an RRSP?
A Registered Retirement Savings Plan is a means for you to save and invest your money. Created by the Federal government, an RRSP is a tax-deferred account (as opposed to tax-free) that allows you to put aside and accumulate money tax-free until such time that you need to withdraw it.
What Can be Bought Within an RRSP?
An RRSP itself is not an investment. Rather, it is a plan that allows you to buy investments and defer your taxes on them. As such, nearly any investable assets are appropriate. This includes mutual funds, government and corporate bonds, guaranteed investment certificates, securities listed on a designated stock exchange, and money itself.
Where Do I Buy Investments for My RRSP?
There are several places where you may purchase investments within your RRSPs: investment companies, banks, stockbrokers, and insurance companies, among others.
What is the Deadline to Invest for the Current Year?
For your RRSP contributions to qualify for the 2019 tax year, they need to be made by the March 20, 2020 deadline.
The contribution period usually begins on March 2nd of a given year and extends through the first 60 days of the following year. These dates are important to keep in mind, especially the first 60 days of the calendar year, as the contributions made during this time can only be declared on the previous year’s tax return.
An example for clarity:
Say you decide to contribute $2,000 to your RRSP and do so on February 21, 2020. This falls within the first 60 days of the year, Accordingly, this contribution must be declared on your 2019 tax return. You may also choose not to use them in order to carry them forward to the following year, though the contributions need to be declared on your 2019 return.
How Much Money Can I Put Into the Plan?
There are limits to what you can put into the plan. The amount is limited to the lesser of 18% of your earned income, or the set maximum, determined each year. This maximum, referred to as your RRSP Limit, can be found by looking at your previous year’s Notice of Assessment, or by visiting the My Account website of the CRA. The set maximum amount for income earned in 2019 is $26,500.
Note that to the CRA, earned income is defined as employment income, net self-employment income, taxable support payments, net rental income, etc. Not all income is considered earned income in the eyes of the CRA.
What are Some Other Advantages of Contributing to an RRSP?
While the primary advantage of contributing to an RRSP is the fact that your money can grow in a tax-deferred manner until withdrawal, you also receive a tax deduction. Any RRSP contributions that you make during the year are deducted from your total income when calculating your net income, which is an immediate return on your investment.
Here’s an example to help explain:
Last year, Ben made $40,000. He was able to put aside $3,000 to invest and wants to put it in an RRSP. His salary puts him in the 15% tax bracket. That means he will pay $6000 in taxes ($40,000 X 15% = $6,000) without an RRSP. With a $3,000 contribution, Ben’s payable tax drops to $5,500 ($40,000 – $3,000 = $37,000 X 15% = $5,500).
This is a simplified example for illustration, and does not take into account provincial taxes, or the effect on other credits from lowering the net income. Some credits, such as the GST credit, medical expense credits, and the Canada Child Benefit are based on net income. Therefore, reducing one’s net income can result in an increase in these credits.
Does the Deferral of Taxes End at Any Time?
Yes, beginning at age 71, the CRA requires that you begin making withdrawals at set percentages. These percentages will increase as you age. At this point, your RRSP converts to an RRIF (Registered Retirement Income Fund). These withdrawals count as taxable income on your tax return.
While that may be a bit disappointing, keep in mind that for many years, your money has been growing, tax-free, and money that has not yet been withdrawn will continue to accumulate tax free.
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