The Registered Retirement Savings Plan (RRSP) was created in 1957 and is the oldest of the registered accounts. In fact, you can deduct the amount you invest into an RRSP from your annual taxable income, up to 18% of the previous year’s income, or $26,010. Unused contributions can also be accumulated. However, when the money is withdrawn from the RRSP, the contribution room associated with the amount withdrawn is lost forever. An RRSP is therefore a means to defer taxation on the sums deposited, as well as on any gains made on the sums deposited. But it is impossible to fully escape taxes with an RRSP, and the logic behind this system is simple. In reality, the intent is that we should be withdrawing these amounts when we are retired and our taxable income is therefore very likely lower. That’s why we should pay less tax.

 

Why is there an RRSP season?

The RRSP does not derive its advantage from being able to accumulate its contributions, but from the reduction in taxable income. Based on this principle, it is important to remember one essential thing: Each year, you lose the opportunity to reduce your taxable income 60 days after the end of the previous one.

In other words, you can contribute to your RRSP all year because it has no deadline. However, the 60-day timeframe allows you to reduce your taxable income from the previous year thanks to the RRSP. For example, in 2019 you had until March 1 to reduce your taxable income for 2018.

 

RRSP account limits

Likewise, with an RRSP, sooner or later you are going to have to pay tax on the money invested. Also, because this money will have grown in the account, you may pay even more taxes in the future. What’s more, the money you take out of your RRSP will be taxed as income. So be careful if your returns are exceptional. In fact, you may end up with less money when withdrawing money from your RRSP than if you had invested it in a TFSA. The RRSP’s tax advantage stems from the fact that we generally have less taxable income at retirement.

 

What if you don’t retire?

If you’re going to retire after you turn 72, it could definitely cost you more in taxes. In fact, an RRSP account must be emptied no later than the year you turn 71. And if you end up making more at that age than today, you could be taxed more on this money than you would have been if you had decided not to contribute today. This is why you need to be vigilant and have foresight when choosing an RRSP.

 

Use your RRSP to purchase a home or return to your studies

You should know that RRSP accounts are not just a way to prepare for retirement. In fact, under the Home Buyer’s Plan (HBP), you can withdraw up to $25,000 from an RRSP to pay the down payment on your first home, for example. But that’s not all! Usually, when you think of saving for education, you think of a Registered Education Savings Plan (RESP) rather than an RRSP. Nevertheless, it is useful to know that you can withdraw a total of $20,000 (annual limit of $10,000) from your RRSP to pay for your studies, thanks to the Lifelong Learning Plan (LLP). The condition is that you must repay the amounts withdrawn back to the RRSP within a specified time frame.

 

The rules for repaying the LLP and the HBP

  • First, there’s a repayment period of 15 years for the HBP and 10 years for the LLP.
  • Under the HBP, you have 2 years from the first withdrawal to start repaying the RRSP.
  • Under the LLP, you have a maximum of 5 years from the first withdrawal to start repaying the RRSP.

 

In summary

If you decide to opt for an RRSP, don’t hesitate to consult our comparison tools for online brokers and robo-advisors, most of which offer RRSP accounts.

 

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