These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
Registered Retirement Savings Plans (RRSP) are one of the most popular savings plans for Canadians. They originally started in 1957 and have continued to evolve over the years. They are designed as a means for Canadians to top up their Canada Pension Plan and Old Age Security payments in a tax advantaged way. RRSP’s in and of themselves are not ‘investments’ in the truest sense but rather a type of savings account/plan that receives preferential tax treatment. Many different types of investments (ie GIC, mutual funds, stocks, bonds, etc) can be held within a RRSP account.
What makes RRSP accounts different from regular savings accounts and vehicles is how deposits and the underlying investments are taxed. Unlike regular savings accounts where all investment gains (ie interest, capital gains, dividends) are taxed, investment gains within an RRSP are not taxed. They grow tax free.
One of the biggest advantages of RRSP is that contributions (to certain prescribed limits) reduce the contributor’s taxable income, thus saving income tax. Canadians can contribute up to 18% of their previous years ‘earned’ income to a maximum of $26010 (for 2017) to an RRSP. Any previous years contributions that are not used can also be carry forward for future years. Your tax return summary every year will indicate what your total contribution limit is.
Any withdrawals from a RRSP are subject to income tax (given that the deposits were given tax deductions at time of contribution). Withdrawals will be subject to withholding penalties at the time of the withdrawal, ranging from 10% to 30% depending on the amount withdrawn. RRSP are intended to be long term retirement savings plans and not short term savings plans.
No further contributions can be made to RRSP for persons older than 71. No later than the year that a person turns 71, RRSPs must be collapsed. The most tax efficient manner to collapse a RRSP is to convert it to a Registered Income Fund (RIF) which will be discussed later.
There are many different ways RRSP can help minimize a person’s income tax. Including making Spousal Contributions to a spouse/partner who may not work or have a lower income level. It is best to discuss how RRSP savings plans are best suited for your family and individual circumstances with an investment specialist. There are other investment vehicles such as Tax Free Savings accounts (TFSA) and Registered Education Savings Plans (RESP) that may also be suitable. One should also consult an investment specialist to help choose the best investments for your individual and family circumstances. TFSA, RESP, RIF will be discussed this week in other Daily Financial Tips.
Share these ideas with friends and family and come back to check out daily financial tips and ideas. If there are subjects you wish covered or questions, please email me and I’ll include them in future posts.