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The registered retirement savings plan is a tax-deferred savings account that can help Canadians prepare for retirement.
Any Canadian who files their income tax return with the federal government is eligible to open a registered retirement savings plan (RRSP).1 For married couples or people in common-law relationships, if one partner earns more annual income, the couple can choose a spousal RRSP. This income-splitting strategy can help reduce a couple’s overall tax payment when they withdraw funds from their RRSP.
In addition, the Home Buyers’ Plan lets first-time home buyers withdraw up to $25,000 from their RRSP to buy or build a qualifying home. Also, under the Lifelong Learning Plan, you can withdraw up to $10,000 annually (maximum amount of $20,000) from your RRSPs to pay for education or training for you, your spouse or common-law partner.
Each year, Canadians can contribute whichever is less – 18% of their annual income or the maximum amount set by the Canada Revenue Agency ($26,010 in 2016) – to their RRSP up until March 1. When you contribute to an RRSP, your money grows tax-free inside the plan.2
Since tax is deferred on RRSPs until funds are withdrawn, RRSPs may be particularly useful for wage earners whose income will be lower in retirement. For example, if you’re earning $80,000 per year and subject to 25% in tax, but expect to be have less annual income in retirement (e.g., $40,000 and subject to 15% in tax), it would make sense to put money into an RRSP while you’re working and then withdraw the money in retirement so that you would pay taxes at a lower rate.
A range of investment options – including mutual funds and segregated fund policies – can be a part of your RRSP.
Keep in mind that you’ll have to pay taxes and administrative fees if you take money out of an RRSP.
If you don’t make the maximum contribution to your RRSPs in a given year, you can carry forward the unused contribution balance. For example, if the maximum amount was $25,000 and you only contributed $5,000, you could carry forward $20,000 and make up the contribution later on. Your federal notice of assessment will show you the amount of your unused RRSP contributions.
1 Age restrictions apply. You must convert your RRSP to an RRIF by the end of the calendar year in which you turn age 71.
2 Keep in mind that a pension adjustment may reduce the RRSP deduction limit. Speak with your financial security advisor to learn more.
Working with a financial security advisor can provide you with the tools and expertise you need to plan for the future.