What is RRSP?

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.