Getting right into it.
What is an RRSP?
A Registered Retirement Saving Plan (RRSP) is a government sanctioned investment plan designed to help a taxpayer save for retirement by making contributions that are tax deductible.
This means that you can contribute to an RRSP and claim the deduction from the income in the year of the contributions.
- The investment income earned in an RRSP is sheltered from taxes until you withdraw from the plan.
- By contributing to an RRSP you can reduce your taxable income.
- Even though withdrawals are taxed, many people have a lower marginal tax rate (MTR) in retirement as compared to their working years. This creates a tax deferral opportunity. If you plan it properly, you get refunds during your work life when tax rates are higher and consequently you might be able to pay lesser amounts of tax during your retirement years when you’re making withdrawals.
Types of RRSP’s
1. Regular RRSP
In this type of RRSP, you make contributions to your own plan and the funds are managed by an investment company or a financial institution.
2. Spousal RRSP
This type of RRSP is a great way to setup split income for saving taxes during retirement years. The contributing spouse is the one who has the higher income. The goal of this plan is to shift RRSP assets under the lower income spouse so that during retirement the income from the plan is taxed at lower marginal rate therefore providing tax savings.
3. Group RRSP’s
These RRSP’s are usually sponsored by a union, an employer or a professional association. They are managed by insurance companies and even financial institutions. Usually, both the employer and employee contribute to this RRSP. The employer might match the employee’s contribution to a certain limit or percentage of income.
4. Self-Directed RRSP
A self-directed RRSP is managed by the taxpayer themselves. You have the freedom to build and manage your own portfolio to get the highest possible return. You should only consider self-directed RRSP’s when:
- You have the time and know-how to manage your own investments or have access to professional advice
- And you have a large deposit-based RRSP
Contribution Limit for 2019
You can contribute 18% of the previous year’s Earned Income, up to the Maximum Contribution Limit, adjusted for carry-forward contribution room and pension related items.
Your contribution limit is also available on your latest Notice of Assessment or Reassessment from the Canada Revenue Agency (CRA).
Deduction Limit for 2019
The RRSP deduction limit is 18% of your Earned Income for 2018 or $26,500 whichever is less.
For example, if your Earned Income in 2018 was $70,000, then your RRSP deduction limit is 18% of $70,000 = $12,600. This is less than the maximum limit of $26,500 set by the CRA.
Contribution Deadline for 2019
The RRSP contribution deadline is March 2, 2020. Be sure to make your contribution well before this date so that it can be applied against your 2019 income.