A Registered Retirement Savings Account (RRSP) is a valuable financial product that helps you save a portion of your income for your retirement years. As long as you’re below 70 years of age, you can invest a sum each year before March 1st and avail of its many benefits.
Best RRSP Savings Accounts in Canada
Different Categories of RRSP Savings Accounts
You’ll register the Individual RRSP only in your name. Any tax benefits that you earn from this investment will belong only to you.
Compare RRSP Savings Accounts in Canada
Citizens who turn 71 years can contribute to the investment plan only up to December 31st. If you need more information about the RRSP and how it works, you’ve come to the right place. Read ahead for details about how this investment opportunity works.
You Can Contribute a Percentage of Your Yearly Income into the RRSP
Your accountant or CRA can advise you best on the amount you can contribute into the RRSP for the year. These limits can change each year and typically remain around 18% of the income you earned or up to $26,230, at the most. Although you can deposit more funds into the RRSP, only a specific limit can be claimed as deductible.
Spousal RRSP for a Spouse or Common-Law Partner
The Spousal RRSP is owned and registered in the name of your spouse or common-law partner. You can contribute funds into the account and avail of the savings on taxes by claiming the contribution as a deductible. But, any benefits will belong to your partner. The qualifications for Spousal RRSPs include:
- Cohabiting as a couple for at least 12 months
- Sharing custody and supporting the children of partners from a past relationship
- Sharing children by birth or adopting them
Group RRSPs Offered by Employers
Group RRSPs are typically taken by employers offering retirement plans as a part of the employment benefits package for their workers. Employers pay for the opening and management of the plan. A section of your salary is automatically deducted and added to the plan. Your employer may match the amount or add to it, so you save for your retirement much faster. Withdrawing funds carry certain conditions laid down by the employing company and financial institutions issuing the investment plan.
Making Withdrawals on Your RRSPs
RRSPs are specifically designed to encourage Canadians to save significant sums before their retirement and deter withdrawals unless it is absolutely essential. The saved amount may seem like an easy source of funds, but it is more beneficial to delay dipping into it for as long as is possible. RRSPs carry certain conditions on withdrawals such as:
- Each amount you withdraw will incur a tax because it becomes taxable income. For instance, if you take out $15,000 from the RRSP, you’ll pay tax on this amount when filing the annual returns. If you earned an income of $50,000, the total taxable income becomes $15,000 + $50,000 = $65,000. An important factor to remember about early withdrawals is that you could end up in the higher tax bracket and pay higher taxes.
- The financial organization where you’ve bought the RRSP investment deducts income tax on the amount you withdraw and pays it directly to the federal government. Different states have their own regulations. For instance, Ontario may deduct anywhere from 10% to 30% depending on the actual amount withdrawn. But, in Quebec, the rates can vary from 5% to 15% in addition to a provincial tax.
Making Tax-Free Withdrawals on the RRSPs
In certain circumstances, the law allows you to withdraw from the RRSPs without incurring any taxes. Here are some of them.
- If you’re a student requiring money to pay for an education or training, you can withdraw a maximum of $25,000 from the RRSP. As a married student, both partners can each withdraw $25,000 without incurring taxes. The condition is that you deposit the amount back into the plan within 10 years. Further, you can withdraw only $10,000 within 1 year.
- As a first-time homebuyer, the law allows you to withdraw a maximum of $25,000 from the RRSPs to pay as a down payment for buying a house. If you pay back the amount within 15 years, you won’t incur any taxes on the withdrawn amount.
Choosing Between an RRSP and TFSA – The Better Option
When considering the best options for saving up for retirement, you can choose from Registered Retirement Savings Plans (RRSP) or Tax-Free Savings Accounts (TFSA). Any contributions you make toward an RRSP are tax-deductible since you’re putting away funds for retirements. But, TFSA deposits are not exempt. However, the key advantage is that if and when needed, you can withdraw from the TFSAs without incurring any penalty.
Here’s an example. Say, you’ve invested $5,000 out of your early income of $45,000. Accordingly, you’ll pay income tax only on $40,000. However, if you deposit $5,000 into a TFSA, you’ll still pay income tax on $45,000 or the entire income amount. In any case, know that the interest you earn from both investment options won’t incur any income tax.
If you’ve been looking for other options where you can invest your money, earn interest, and save on taxes, check out our listings on offerhub.com. We have compiled together some of the best plans for saving for retirement.