What is an RRSP?
An RRSP or Registered Retirement Savings Plan is an investment plan registered with the government where you or your spouse can make financial contributions through RRSP-eligible investments, such as specific stocks and mutual funds or segregated funds. These investments are normally tax-deductible contributions and the income earned within the plan is exempt from tax until the owner receives payments from the plan. Funds are usually held in an RRSP until retirement at which time the contributions may be withdrawn or transferred to other investment plans.
RRSP’s are ideal for
- individuals who do not belong to a pension plan;
- individuals whose pension plans are inadequate;
- individuals who want a higher retirement income than their pensions can provide.
When the money is withdrawn from an RRSP, it becomes taxable income. If the income is withdrawn at retirement, the investor’s tax rate is usually lower in comparison to his/her peak earning years.
The maximum annual tax-deductible contributions to RRSP an individual is per mitted to add into his/her plan must be lesser than the following:
- 18% of the previous year`s earned income,
- The RRSP limit for the year,
- The previous year`s pension adjustment and the current year`s past service pension adjustment
- The unused RRSP contribution room at the end of the preceding taxation year.
Types of RRSPs
RRSPs can be categorized in different types:
1. Group and Individual RRSPs:
Group RRSPs provide benefits similar to those offered by individual RRSPs with the exception that the employer, union
or professional association administers them as a group plan.
- Employees contribute through wage deduction matched in whole or partial by the employer, union or association.
- Both the employee and employer contributions are deductible from taxable income.
- Employer contributions are considered additional salary to the employee.
2. Managed and self-directed RRSPs:
In both types, the plan holder chooses from a variety of investments.
- Self-directed RRSPs are available through banks, trust companies and investment dealers. All investment decisions are made by the plan holder.
- In a managed RRSP, the holder`s deposit is invested in products held in trust under the plan and no further investment decisions are required by the plan holder.
3. Spousal RRSPs:
This type of RRSP permits an individual to contribute to an RRSP for his or her spouse (or common –law partner) and claim the deduction so long as the contribution does not exceed the maximum amount available for his/her spouse’s own RRSP plan.
Since the RRSP is registered under the spouse’s name, any withdrawals made from the RRSP will be treated as taxable income for the spouse and not the contributor. However, a contributing spouse may be liable for tax on the withdrawn funds.
First Time Home Buyer Plan (HBP)
When purchasing or building a home for the first time, the first time Home Buyer’s Plan (HBP) allows you to borrow up to $25,000 in a calendar year from your Registered Retirement Savings Plans (RRSPs). You can withdraw a single amount or make a series of withdrawals within the same calendar year.
Your RRSP contributions must remain in the RRSP for at least 90 days before you can withdraw them under the Home Buyer’s Plan, or they may not be deductible for any year. However, some plans, such as locked-in or group RRSPs, do not allow you to withdraw funds from them.
Borrowed funds must be repaid within 15 years to the RRSP, in equal annual installments. Any missed or incomplete payments will be considered income and taxed for that year.
If you take advantage of the First Time Home Buyer’s Plan, it is mandated that you must buy or build the qualifying home before October 1st of the following year from the year of the withdrawal. For instance, if you withdrawal the qualifying amount from your RRSP in January of 2010, your house must be purchased or built before October 1st of 2011.
Excess payments made above the minimum requirement each year will reduce the required payments in future years. Re-payments to one’s RRSP will begin two years after the year of withdrawal. As with RRSP contributions, you are allowed to make repayments within the 60 days following the year end. Repaid amounts do not receive a tax deduction and they do not affect your annual RRSP contribution limit. You also have the option of repaying the funds earlier without penalty.
Individuals cannot participate in the Home Buyer’s Plan if they or their spouse has owned a principal residence and lived in it for five calendar years before the time of withdrawal. This Home Buyer’s Plan can only be used once.
Lifelong learning plan (LLP)
The Lifelong Learning Plan (LLP) is a Canada Revenue Agency program that allows you to withdraw up to $20,000 (annual limit of $10,000) from your Registered Retirement Savings Plans (RRSP) to finance full-time training or education for you, your spouse, or common-law partner. However, the LLP cannot be used to finance your children’s training or education, or the training or education of your partner’s children.
ALL of the following conditions must apply:
- The student must be a full-time student (or a part-time student if he or she meets the disability conditions)
- You (the RRSP owner) must be a resident of Canada
- The student has to enroll in a qualifying educational program at a designated educational institution
- Participation in the Lifelong Learning Plan (LLP) has to be done before the end of the year the student reaches the age of 71 years old.