What is
RRSP?
RRSP stands
for Registered Retirement Savings Plan. It is essentially savings for future
and your retirement. It is a saving plan that is registered with Canada Revenue
Agency.
What are
the tax consequences of saving in RRSP? :
When you
save money into your RRSP, you get the tax break and the year in which you
withdraw the money from it, is the year of its taxability. You can withdraw
from your RRSP after a minimum period of 90 days. The growth inside the RRSP
plan is tax free. You can invest in either fixed income securities or variable
securities as per your risk tolerance ability. Earlier you invest into your
RRSP, better it is from its growth perspective.
You can
invest into your RRSP up to the end of 60 days from the year end and still
entitled to a tax break for the same year e.g. if you invest into your RRSP
either in January 2017 or February 2017 and will still be counted as tax break for the
year 2016. Of course, you cannot invest into RRSP over the limit of RRSP. RRSP
limit is determined in a particular way as laid down in the Income Tax Rules
but the simplest thing to find out your RRSP limit for the year 2016 will be to
see the Notice of Assessment for the year 2015 sent to you by CRA. If you
invest into RRSP over your limit plus $2,000, you could be liable to a penalty
of 1% per month on the excess amount invested.
Types of RRSP:
Investment
into your RRSP could be either regular or spousal. Spousal RRSP means that the
annuitant (beneficiary) of the fund
is your spouse. Of course, the contributing spouse is entitled to a tax break
and it is counted against the limit of contributing spouse. If the spouse
withdraws this RRSP before the end of three years from the date of investment,
it is treated as an income of the contributing spouse.
Can you
withdraw from your RRSP tax free?
Yes, you can
withdraw from your RRSP on a tax free basis if such a withdrawal is qualified
one. There are two qualified withdrawal from RRSP, 1) First Time Home Buyer
Plan Withdrawal and 2) Life Long Learning Plan withdrawal. Both the withdrawals
have its own conditions to qualify.
Up to
what age you can contribute to your RRSP?
You can
contribute to your RRSP up to the age of 71 years. If you are contributing to
spousal RRSP then spouse age of 71 years is regarded for contribution.
What
happens after the age of 71?
After 71
years of age you can either withdraw all the money and pay tax on such
withdrawal which is an unwise move since half of the RRSP withdrawal will be
lost into the payment of taxes. Second option for you is to convert it to RRIF
(Registered Retirement Income Fund) which will continue to invest your money
and at the same time allow you to make steady withdrawal each year for your
living and pay minimum taxes. Another option for you is to purchase an annuity
for you. There are different types of annuities available on the market place.
Disclaimer: Any discussion
on this blog relating to tax matters is purely for educational purposes and not
taking any specific actions based the general tax rules described therein. Your
tax situation could be different and as a result there may be different tax strategies
applicable under individual cases. We do not claim the tax situations described
above to be exhaustive or conclusive. In case of any specific tax situations or
problems, you are advised to seek professional advice.
