Have you considered how you will support yourself when you retire? Once the paychecks stop, you’ll need another form of income to pay any bills you might still have and to provide you with spending money so you can enjoy this new phase of your life. And that’s exactly why RRSPs were established decades ago.
In order to help you save for retirement, RRSPs have made things a little easier. Plus, their tax benefits make them a better way to save as opposed to just putting your money aside in a regular savings account.
What is an RRSP?
An RRSP – short for “Registered Retirement Savings Plan” – is a Canadian government-registered retirement account that is meant to help Canadians save for retirement. This account offers a way for people to save their money for the Golden Years and invest it so that it earns interest and grows without tax consequences.
Not only do RRSPs help save for retirement, but they can also help reduce your overall income taxes. This is because you can deduct the taxes from your annual RRSP contributions. Plus, all of the capital gains realized are not taxed as long as the money stays in your RRSP account.
It should be noted that the taxes on earnings from your RRSP will eventually be taxed. Rather than completely reducing your taxes, they are deferred. As such, RRSPs can be thought of as a tax-deferral plan, and not a tax-reduction program. While the money remains tax-free when it stays in the account, income tax will eventually have to be paid when the money is withdrawn.
How Does an RRSP Work?
The CRA sets contribution limits annually, which tend to increase by small increments every year. You can then use this contribution as a tax deduction when you file last year’s taxes. For instance, if your contribution is $4,000, your income would then be reduced by $4,000 when you calculate how much you owe in taxes. As such, you end up paying less in income tax because you’re using a lower earned income figure when calculating them.
Your RRSP can stay open until you turn 71 years of age, at which point your RRSP will either have to be closed or converted into a Registered Retirement Income Fund (RRIF). Your RRIF can be used to generate income from the savings you made under your RRSP.
What Kind of Investments Can an RRSP Hold?
You can hold several different investment types in your RRSPs, including the following:
- Mutual funds
- Income trusts
- Precious metals
Types of RRSPs
Individual RRSP. With an individual RRSP, your name is registered on the account. All investments in this RRSP and the tax benefits that come with them are yours. You can manage and grow your RRSP investment portfolio on your own or you may choose to work with an advisor.
Spousal RRSP. A spousal RRSP is registered in both your name and the name of your spouse or common-law partner. You contribute to the account, and your spouse owns the investments in the RRSP. You can benefit from the tax deduction for your contributions by reducing your own RRSP deduction limit for the tax year.
Spousal RRSPs offer a way for you and your spouse to divide your income more evenly when you retire. The combined income tax paid jointly as a couple can be lower than what would be required to pay if all your joint savings were in one RRSP account. If you earn more than your spouse (in which case you’d be in a higher tax bracket), you may want to consider a spousal RRSP.
Group RRSP. Your employer may offer group RRSPs to help you and other employees save for retirement. With this arrangement, you would open an individual RRSP but contribute through your employer.
With this plan, you contribute to your RRSP automatically from your paycheque, after which your employer will match your contribution. While you pay investment costs, your employer will pay the management expenses.
What is the Contribution Limit For an RRSP?
Each year, you have the ability to contribute your earned income to an RRSP account. However, there is a limit to how much you can contribute every year, which is known as your “contribution limit.”
This limit is either 18% of your earned income from the previous year or a specific amount determined by the Canada Revenue Agency (CRA), whichever of the two is lower. For 2020, that contribution limit is $27,230.
Withdrawing Money From Your RRSP
To withdraw your money from your RRSP, you can do so in a couple of ways.
Lifelong Learning Plan (LLP). To withdraw from an RRSP, Form RC96 will have to be filled out. This form must be completed every time a withdrawal is made. You can withdraw up to $10,000 per year up to a total of $20,000. However, it must be paid back within 10 years. You can take part in the LLP again, beginning the year after your LLP balance is brought back to zero.
The amount you take out is not limited to any education expenses. Instead, the money can be used for any purpose as long as you meet the LLP conditions when the withdrawal is made.
Home Buyers’ Plan (HBP). If you are a first-time homebuyer, you can use the money in your RRSP account to put towards the down payment of a home through the Home Buyers’ Plan (HBP). With this plan, you can borrow up to $35,000, tax-free.
If you are buying a home with another person who is a first-time buyer too, you can each take out $35,000 from your RRSPs for a total of $70,000. You will have to repay the money within 15 years.
Both of these programs essentially involve you borrowing from yourself. You won’t pay any interest nor any income tax on your withdrawals since the money is yours.
Difference Between an RRSP and a TFSA
|Contribution Limit||$6,000||– 18% of earned income|
– or a max of $27,830
|Withdrawals||Withdrawals are tax-free||Withholding tax charged when funds are withdrawn before retirement|
Benefits of an RRSP
Tax-deductible contributions. The contributions you make to your RRSP account are free of taxation while they remain in the account. This effectively reduces your earned income, which means you pay less in income taxes.
If your income is lower in a given year, you can carry the deduction forward for your contribution to a year sometime in the near future. This will be especially helpful when your income is higher and you’re in a higher tax bracket.
Save your money tax-free. With traditional investments, you’re required to pay taxes on any gains made. But with an RRSP, you don’t have to pay any tax on your earnings as long as they remain in your RRSP.
Use your RRSP funds for retirement. When you retire, you can convert your RRSP to receive regular payments. Although you will have to pay tax on the regular payments received every year, you’ll pay less tax because you’re in a lower tax bracket in retirement.
Spousal RRSPs can reduce your combined tax requirements. If one spouse makes more money than the other, the lower-earning spouse can build their tax-free savings with a spousal RRSP. In retirement, income will be split more equally between you both, which can lower the overall tax amount owed.
Use the money for a down payment. Coming up with a sizable down payment to buy a home can be tough, especially for first-time buyers who don’t have the proceeds of another home to be put toward another home purchase. With the Home Buyers’ Plan, you can use the money in your RRSP to be used for a down payment.
Ready For an RRSP? Here’s How you Can Start
You can open an RRSP account at a number of organizations, including:
- Trust companies
- Insurance companies
- Investment companies
- Mutual fund companies
Shop around with various institutions to see what each offers and what fees are involved. You will also want to determine what types of investments you want your RRSP account to hold, such as stocks, bonds, ETFs, and so forth.
If you are opening an RRSP account with an institution that you are not yet a member or client of, you’ll need to provide certain pieces of identification, one of which must be a government-issued document. You’ll then need to complete an application and answer questions about your financial goals, level of investment knowledge and experience, and who your beneficiaries are.
To open an RRSP account, you will need to put money into it by either transferring funds from another account or make a contribution from another RRSP account you may have already.
Best RRSP Savings Accounts
|Motive Financial||RRSP GIC: 1.50% to 2.50%|
RSP Savings Account: 0.25%to 1.25%
|Wealthsimple||Rate of return is based on exact assets invested in||0.4% – 0.5%|
|Tangerine||2.50% for 5 months|
|Questwealth||Rate of return is based on exact assets invested in||0.2% – 0.25%|
|EQ Bank||1.05% – 2.30%||$0|
Motive Financial is an online-only bank that is insured by the CDIC, so all deposits up to $100,000 per customer are protected. The digital bank offers many of the products and services that you’d typically find with a traditional bank, such as RRSP accounts.
Motive Financial offers two different RRSP accounts. The RRSP GIC comes with rates that range from 1.50% to 2.50% for terms as short as 12 months to as long as 120 months. The Motive RRSP Savings Account offers a rate of 0.25% for deposits up to $2,500, and 1.25% for deposits over $2,500.
MAXA Financial is an online bank and a subsidiary of a Manitoba-based credit union. Thanks to this affiliation, MAXA Financial is a member of the Deposit Guarantee Corporation of Manitoba (DGCM), so deposits are insured. Clients can do their banking online or through the mobile app that can be downloaded for both iOS and Android devices.
MAXA Financial offers a number of banking products, including an RRSP High-Interest Savings Account. Right now, the posted rate for the account is 1.60%, which is paid out monthly and matches inflation. There’s no minimum balance required and no monthly maintenance fee.
Wealthsimple is a Canadian robo advisor, which offers investors a way to invest entirely online without the sky-high fees that are typical of a traditional investment brokerage. Investors with minimal capital can open an account and get started investing to grow their wealth thanks to the low barrier to entry that Wealthsimple offers.
The online brokerage is a member of the Canadian Investor Protection Fund (CIPF), which covers accounts up to $1 million.
In addition to traditional investment vehicles, Wealthsimlpe also allows Canadians to open an RRSP account that is matched to a low-cost investment portfolio of ETFs. Wealthsimple charges fees that range from 0.4% to 0.5%, depending on the amount invested. However, fees on the initial $10,000 are waived over the first year, and there is no minimum amount required to open an account.
Tangerine is one of the original online-only banks in Canada. Previously known as ING Direct, Tangerine was renamed shortly after it was bought out by Scotiabank. Tangerine is a member of the CDIC, so deposits are protected in the event of their bankruptcy.
The digital bank offers a slew of banking products that mimic big traditional banks, including its RSP savings account that comes with an interest rate of 0.20%. There are no monthly fees or minimum balance requirements, and new clients may be eligible for a 2.50% rate for five months when an account is opened within 24 hours of a Raptors NBA Playoffs game.
Questwealth Portfolios are offered by Questrade, a Canadian investment brokerage and wealth management company. Questwealth’s management fees are some of the lowest in the industry and range from 0.2% to 0.25%, depending on the investment amount.
Questwealth clients have two ways to invest in RRSPs with the online platform. With the Self-Directed investing, you can build your portfolio yourself that includes RRSPs invested in ETFs, stocks, options, and more. With a Questwealth pre-built portfolio, you can have a professional investment advisor create your portfolio for you based on your financial goals and risk tolerance.
motusbank is an online-only bank that offers a number of banking and investments products, including RRSPs. Deposits made through motusbank are insured with the CDIC thanks to its affiliation with Meridian Credit Union, a large credit union in Canada.
motusbank’s RRSP account comes with a rate of 1.30% to help you grow your money and save for retirement without any monthly account fees.
EQ Bank is the subsidiary of Equitable bank; a federally regulated Schedule I Bank. While Equitable bank offers commercial and residential lending products, EQ provider more personal banking services. They currently offer numerous savings and investment accounts, including an RSP savings account.
Their RSP savings account comes with a high-interest rates between 1.05% and 2.30% and no fees or minimum balance. This makes it one of the most cost-effective options when saving for retirement. Moreover, you can opt for their RSP GIC to earn guaranteed interest. To register for an RSP account with EQ Bank, simply start by opening a Savings Plus Account first.
Having an RRSP account in place can not only help you save for retirement and provide you with some income after your working days are done, but they can also be a source of funds when you have a large expense to make, such as buying a house. The fact that your earnings are kept safe from taxation makes RRSPs an attractive tool to help you reach your financial goals.