What are the advantages of RSPs?
1. Shelter From Tax
When you have an RSP, income earned on your investments is sheltered from tax. You do not pay on the annual income as you would with other types of investments. Instead, the tax is paid when funds are withdrawn from the plan—presumably in retirement, when your other sources of income are much lower.
2. Reduced Current Income Taxes
Because RSPs are fully deductible (up to your max.) on your income tax return, you also save taxes immediately.
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When is the contribution deadline for the 2007 tax year?
Friday, February 29, 2008.
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How much can I contribute?
The RSP contribution limit is equal to 18% of earned income in the previous year minus an individual’s pension adjustment, up to an annual limit.
Annual Limits
2006 $18, 000
2007 $19, 000
2008 $20, 000
2009 $21, 000
2010 $22, 000
After 2010, increases to the annual RSP contribution limit will be indexed. The easiest way to confirm your contribution limit is to look at your Notice of Assessment, which you'll receive after you file your income tax return.
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Who can contribute?
Canadian taxpayers with “earned income” in the previous tax year and a social insurance number.
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What if I don’t make my maximum contribution?
Extra deduction room can be carried forward indefinitely and used in any subsequent year.
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What if I contribute more than my limit?
You can over-contribute up to $2,000 during your lifetime, and deduct the over-contribution in future years - provided you have contribution room against which the deductions can be applied. If you exceed the $2,000, a penalty tax of 1% per month will be levied on the excess amount.
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What is earned income?
You are eligible to contribute to your RSP only if you have earned income. For most people, their “earned income” is the amount of their salary, before deductions such as CPP, EI and tax.
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At what age can I start contributing?
Any time—as long as the individual has earned qualified income in the previous year and a social insurance number to register for the plan. Mutual Fund Clients must be at least 18 years old.
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What is a spousal RSP? And how does it work?
In a spousal RSP, you can contribute to an RSP for the benefit of your spouse. You get the deduction from taxable income, but your spouse will receive the funds from the plan when they are withdrawn, and your spouse will report the income for tax purposes.
Spousal RSPs are extremely effective if your spouse has less income than you and expects less income at retirement. They balance out the couple’s income levels, and reduce the overall tax burden.
Use your RSP contribution limit to contribute to your own plan, a spousal plan or some combination of the two. You have one limit that must be allocated between your own plan and your spouse’s.
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How long can I leave my investments in my RSP?
Your RSP must mature by the year you reach age 71. At that time, you have several options for minimizing your income taxes and spreading out your payments over your remaining years:
- Cashing in your RSP.
- Transferring the investments in your RSP to a Registered Retirement Income Fund (RRIF) or Registered Annuity, from which you must begin drawing retirement income.
(Use our Rif/Lif Illustrator)
- Combining the above two options.
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Can I withdraw funds from my RSP before retirement?
Yes. However, when you do, it becomes income that is taxed. You will have to record both the withdrawal amount and lump sum tax on your income tax return.
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What is the Home Buyers' Plan?
The CRA (Canada Revenue Agency) offers incentives for first-time home buyers. The program lets you withdraw money from your RSPs and put it directly towards a down payment. Use up to $20,000 out of your RSP towards the down payment on your first home and you won't be taxed on it.
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How do I go back to school using my RSP?
The Lifelong Learning Plan (LLP) lets you withdraw amounts from RRSPs to finance training or education for you or your spouse or common-law partner. Withdraw up to $10,000 a year, or $20,000 in total. All you have to do is repay at least 10% per year for up to 10 years with payments generally starting five years after your first withdrawal.
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When is the best time to start investing in an RSP?
The best time to start is the first year you get a job. The sooner you start, the less you have to save each year for your retirement.
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What if I want to contribute now and deduct later?
Claim undeducted contributions in future years — even past age 71.
If you know you'll earn significantly more in the future compared to today, then it may make sense to contribute to your RSP now, without claiming the full deduction.
Your money will earn tax-free returns now and you can use the deduction later. Be careful not to overcontribute.
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Once I start an RSP, do I have to keep contributing every year?
You are not committed to making a contribution each year; but, you are much better off if you do. If you start early and make regular contributions to your RSP, your savings will grow at a much faster rate.
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Is there a minimum amount I need to invest in my RSP?
Yes, but the minimum is often as low as $25. Some types of RSP investments require a minimum deposit of $500.
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