REGISTERED RETIREMENT SAVING PLAN (RRSP)

This method of tax deferral is one of the most significant tax planning ideas available to tax payers in Canada. By making contribution to a RRSP plan deductions from income can be taken in current year within certain limitations. An immediate tax saving can be used for personal savings or for reinvestment purpose.

Beauty of this plan is income earned on the investment is tax free until we start withdrawing them. It usually happens at retirement age, when our tax bract is lower. Client may invest more than 1 RRSP account.

Contribution limits

The RRSP saving system is based on annual limit of 18% of earned income. This 18% limit applies to employer sponsored registered pension plans (RPP), deferred profit sharing plan (DPSP) and registered retirement saving plan (RRSP). This 18% limit is on previous year earned income.

RRSP limits are follows

SPOUSAL RRSP

RRSP contributions may also made to spousal RRSP plan. Spouse and common-law partner are permitted in this plan. If the spouse or common-law partner will have lower tax bracket when funds are withdrawn, it may be advantage to contribute to spousal RRSP account. If funds are withdrawn from spousal RRSP account in first three years you will be required to include withdrawal amount in your income. After three years withdrawal amount be included in your spouse‘s income.

UNDERCONTRIBUTIONS AND OVER CONTRIBUTIONS

Where your contributions are less than 18% limit in particular year, these difference accumulates and carries forward to provide contribution room in the following year in additions to that arising from the immediate prior year’s income. This accumulated carry forward is reported to you on your annual assessment statement from the CRA.

On the other hand contribution in excess of your accumulated contribution room are not deductible, but to the extent they exceed 2000 at the end of month are subject of monthly penalty tax until they are withdrawn from RRSP account.

Tips:

Spousal contribution must be made with your own RRSP contribution room.

RRSP RETURN TABLE

The above table shows the accumulation return on a $1000 investment in the RRSP plan at the beginning of the year. Interest is compounded annually.

Converting your RRSP to retirement income plan

When you reach the age of 71 in a particular year, you must convert your RRSP plan in to retirement income fund (RIF).

Sahib Insurance advisor will guide you thru to the process.