Registered Retirement Saving Plan (RRSP)

Registered Retirement Saving Plan (RRSP)

What is RRSP ?

RRSP is a registered saving plan , which is approved by the Canada Revenue Agency (CRA). It is a type of Canadian account for holding an investment and savings.

Benefits  to open a RRSP ?

The following are the six major benefits of RRSP

1. To reduce taxable income

  • The amount of contribution will deduct from your taxable income, therefore help to reduce the amount of income tax payable.
  • If your income is lower in a current year, then we can carry forward the amount of RRSP contribution to future years when your income may be higher.

2. Any growth in income is tax free

  • Any growth in RRSP( interest on investment) is also tax free until unless the amount stay in the RRSP account.
  • Compounding saving allow faster growth.

3. Conversion of RRSP to RRIF or Annuity

  • At the time of retirement , you can transfer your RRSP to a RRIF (Registered Retirement Income Fund) or an Annuity on tax free basis.
  • When you get any regular payment from a RRIF or an annuity then you will be liable to pay tax, but it will help you to save tax if at the time of retirement you are in lower tax bracket.

4. Spousal RRSP help to reduce your family tax burden

  • If your earnings is higher than your spouse then tax free saving can be build by contributing to a spousal RRSP because retirement income will be split between both of you (detailed discussion in next pages).

5. Borrow money to purchase first home

  • You can withdraw $ 25,000 ($ 50,000 for couples) tax free from your RRSP account to purchase your first home (detailed discussion in next pages).

6. Borrow money for higher education

  • You can withdraw $ 20,000 ($ 10,000 per year) tax free from your RRSP account  for higher education(detailed discussion in next pages).

Contribution Limit

Maximum  contribution limit for tax year 2015 : $ 24,930 ( for 2016 :  $ 25,730).

Computation of maximum RRSP contribution

18% of previous year earned income                                                                                          $ XXX
Add : Any unused contribution room for previous years                                                                  XXX
Less : Net changes in pension adjustment (PA)                                                                           (XXX)
Less : Any past services pension adjustment (PA)                                                                      (XXX)
Add : Any reversal of pension adjustment (PA)                                                                               XXX

Net Contribution limit for 2015 (subject to maximum of $ 24,930)                                           XXX

  • Unused contribution can be carried forward up to the age of 71 years.
  • RRSP deduction = (contribution in tax year + contribution in 60 days of the following year)

 

Penalty for over contribution

1% penalty of excess contribution, however over contribution up to  $ 2,000 doesn’t attract any penalty.

Other Important Points

1. Spousal RRSP

  • Income splitting on retirement.
  • May contribute at the age of 71 years.
  • Contributor doesn’t have any legal rights to spousal RRSP.
  • Contribution to spousal RRSP will reduce your RRSP contribution limit.

      Example :If your contribution limit is $ 10,000 and your contribution to spousal RRSP is $3,000
      then Your own contribution limit would be $7,000
      Note : In this case you can deduct $ 10,000 from your taxable income

       Taxability on withdrawal from spousal RRSP (Anti avoidance rules)

If the amount withdraw  by the spouse , then the withdrawal amount is in included in contributor’s income for tax purpose  i.e. lesser of following will include :

(Amount contributed in the year of withdrawal + contribution in two preceding years)

OR

Amount withdrawal by the spouse.

Note : This rule doesn’t apply if the spouse is living separately due to breakdown / divorce etc. In this case the withdrawal amount is taxable in the hands of the person who actually withdraw the funds from RRSP, not in the hands of contributor.

2. Matured RRSP

RRSP can be terminated at any time , however the plan automatically terminate at the age of 71 calendar years. At this point, the value of RRSP is subject to tax unless the funds used to purchase a RRIF or an annuity.

3. Withholding taxes on withdrawals from RRSP (Tax Deducted at Source)

         From  $ 0         to  $  5,000     is subject to tax @ 10%

         From  $ 5,001  to  $15,000     is subject to tax @ 20%

         Over   $ 15,001                      is subject to tax @ 30%

Note : Transfer of funds from one RRSP plan to another RRSP plan are not subject to tax.

4. Withdrawal of RRSP to purchase first home

  • Only first time home buyers are eligible to withdrawal.
  • Can withdraw $ 25,000 ( $ 50,000 for couples).
  • To eligible, the funds must be deposited for at least 90 days.
  • Must need to repay is 15 years in equal installments.
  • Form T1036 must need to be filed with CRA to report withdrawal.
  • House must need to be purchased by 31st Oct of the following year in which withdrawal made. (e.g. withdraw made in May 2015, then house must need to be purchased by 31st Oct 2016)

5. Withdrawal of RRSP for higher education

  • Can withdraw $ 20,000 ( $ 10,000 per year).
  • Repay the withdrawal amount is 10 years in equal installments.
  • Enrolled as a full time student at least for three months duration

 

Sources : http://www.cra-arc.gc.ca
Image credit: http://401kcalculator.org

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