RRSP

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RRSPs or Registered Retirement Savings Plans are both a savings and retirement plan built into one. It is made for both employees of companies, but also for the self-employed throughout Canada. These plans are very close to what you’d expect from a 401k that is popular throughout the United States.

Growth of an RRSP account is determined by how much you put inside it. You can’t just have money in the account, you must continue to add money into the account. You won’t be able to just retire if there is not enough. Money, pre-taxed, is put into the account and grows tax-free until the money is withdrawn from the account. Once withdrawn, the money is then taxed at the current marginal rate.

These investments with an RRSP are compounded without taxes. Not withdrawing money from your account throughout its lifetime is the best way to guarantee money when retirement comes.

Taking a Better Look a Registered Retirement Savings Plans (RRSP)

Created in 1957 during the Canadian Income Tax Act. These plans are registered through the Canadian government and overseen through the Canada Revenue Agency. They are who sets the rules and regulations for the contribution limits, assets allowed, and other specifics of these investment plans.

There is more than just one tax benefit, but two. First, contributors to the plans can deduct money from their plans against their income.

Example: Tax Rate is 40% - save $40 in taxes with every $100 you invest into your account.

The second benefit is that these investments are tax-deferred. Non-RRSP investments are unlike this, and they do not defer taxes. Any returns are exempt from capital gains taxes and even income taxes. These plans compound on a pre-deferred basis, giving you compounding interest without the tax cuts.

RRSP contributors to this plan delay payment to taxes until they retire from their jobs. This way, they can take the tax amounts from the amount in the account. This is when the marginal tax rate may be lower than the years where they were working. This is an additional tax benefit that the Canadian government has given because they want to encourage saving for retirement, so they offer more tax breaks during withdrawal. This also means less Canadians relying on the Canadian Pension Plan to fund their retirement years.

Types of RRSP Investment Plans

There are several RRSP plans to choose from, but usually, they’re set up by just one or two people such as spouses or individuals on their own. These types include:

  • Individual RRSP which is what it sounds like. The individual or single person sets up the account and is both the account holder and contributor.
  • Pooled RRSPs are an option for small businesses or those individuals who are self-employed.
  • Spousal RRSPs provide all the benefits to both parties of this plan. Usually, this is a couple who come in to invest. The higher earner may wish to contribute to the RRSP in their spouse’s name. The retirement income out of this plan is divided between the two when the money is withdrawn, so both parties can benefit from the lower marginal tax rate.
  • Group RRSPs are set up by employers for their employees to sign up and use. It is funded through payroll deductions from those who sign up. This is much like what you’d find in the United States 401k. Opened and held by a manager and provides immediate tax savings.

Approved Assets

There are several types of investment accounts permitted in RRSPs. They include:

  • Mutual Funds
  • Bonds
  • Equities
  • Savings Accounts
  • Mortgage Loans
  • Income Trusts
  • Foreign Currency
  • Guaranteed Investment Certificates
  • Labour Sponsored Funds

Contributions and Withdrawals to Your Investment Plan

The total amount that can be contributed to an RRSP varies by year, but fortunately, any room that is not used is carried forward indefinitely. According to the information provided by the Canada Revenue Agency back from 2020, the contribution limit is 18% of the earned income of the individual, up to $27,230. There is a possibility to add more into the account, but anything over $2,000 will be hit with penalties to have it added to the savings account.

The contributor to the account can withdraw money from the account at any time, at any age. Any sum that is removed from the account is deemed taxable income, unless the money is being withdrawn to help build or buy a home or for education purposes.

Annual contribution limits
Year Limit
2023 $30,780
2022 $29,210
2021 $27,830
2020 $27,230
2019 $26,500
2018 $26,230
2017 $26,010
2016 $25,370
2015 $24,930
2014 $24,270
2013 $23,820
2012 $22,970
2011 $22,450
2010 $22,000
2009 $21,000
2008 $20,000
2007 $19,000
2006 $18,000
2005 $16,500
2004 $15,500
2003 $14,500
2002 $13,500
2001 $13,500
2000 $13,500
1999 $13,500
1998 $13,500
1997 $13,500
1996 $13,500
1995 $14,500
1994 $13,500
1993 $12,500
1992 $12,500
1991 $11,500
1990 (Old limits)

Registered Retirement Income Funds

When the account holder turns 71, the balance inside the RRSP must be shifted or withdrawn to another plan, known as the Registered Retirement Income Fund or an annuity. A Registered Retirement Income Fund is a retirement fund, as well and it pays out the income to the owner or owners in an *annuity contract.

*Annuity contracts are contracts between you and the company that requires the insurer to make payments to you currently. It is usually a single payment or a series of payments over a course of time. Read your specific pamphlet to find out how the plan works.

The money withdrawn from the RRSP into the RRIF is paid out according to the marginal tax rate that the holder currently has.

For example: There is $300,000 saved for an owner who is 65. The RRIF is going to pay out around $1,000 per month. If this is the only income that the owner has, this is taxed at 15%, leaving just $850 per month. Generally, if this is the case, they’d also receive payments from the Canada Pension Plan.

RRSPs or Registered Retirement Savings Plans are both savings and retirement plans built into one. It is made for both employees of companies, but also for the self-employed throughout Canada. These plans are very close to what you’d expect from a 401k that is popular throughout the United States. It works in almost the same way but does have key differences that make it stand out from the 401k plan.

These investments with an RRSP are compounded without taxes. Not withdrawing money from your account throughout its lifetime is the best way to guarantee money when retirement comes.

401K vs. Registered Retirement Savings Plan

There are both similarities and differences between the 401K and Registered Retirement Savings Plan. Here are some of the differences to make note of:

  • 401k’s are not available to anyone throughout Canada, as they're just a United States account.
  • Contribution limits on RRSPs may be able to be carried forward.
  • Contributions to your RRSP can come from your payroll or cash contributions which can come with some tax rebates. Payroll deductions are what funds 401k plans.
  • A 401k has early withdrawal penalties on them (with exceptions); RRSPs do not have this limitation.

It is recommended that you reach out to a financial advisor who would be able to provide more input, resources, and tools for you to make smarter investments. This way, you can have all of your questions answered by a professional advisor who has years of knowledge on investments you can make.