Everyone plans to retire eventually, and a Registered Retirement Savings Plan (RRSP) is a great way to save for this eventuality. There are many different forms of RRSP’s, and, much like the TFSA discussed last week is more a wrapper to put on an account instead of an account itself. So let’s look deeper into the specifics of one of Canada’s most popular savings plan.
Different Types of RRSP
Unlike the TFSA the RRSP is a bit more complicated in that there are multiple types of RRSP’s available to you, so before the advantages and disadvantages can be discussed I’ll explain what each of these different types is.
An individual RRSP is an account held by and contributed to by only one individual, thus it’s named. This is the type of RRSP that this article will go more in-depth into.
A spousal RRSP is a form of RRSP that allows one spouse to contribute to their significant other’s RRSP. This is commonly used when one spouse earns or contributes significantly more than the other. For example, an employed parent with a stay-at-home parent. This form of RRSP allows the employed parent to contribute in their spouse’s name, giving the spouse the benefit of having an RRSP upon retirement while giving the contributor the tax bonus immediately.
Group RRSP’s are company sponsored, where an employer will deduct a certain amount from an employees paycheque and contribute it to an RRSP in that employee’s name. The largest bonus to these forms of RRSP is that the employer can immediately reduce the amount of income tax deducted from the employee’s pay, thereby allowing them to pay less tax.
Also known as PRPP’s, these accounts are similar in nature to the group RRSP’s but instead adapted to self-employed individuals and small businesses who are unable to participate in group RRSP’s.
Advantages and Disadvantages
|Based on your income||Don't pay taxes on contributions||Penalized if withdrawn from before retirement|
|Can put many types of accounts inside an RRSP||Pay taxes on withdrawals||Only takes into account previous year's income|
|Been in existence since 1957!||Can be confusing||Savings growth is taxed upon withdrawal|
|Cool tax things can be done with an RRSP||Has to be cashed out or transferred at age 71|
Unlike TFSA’s an RRSP’s contribution limit is based on your income. More specifically, the RRSP contribution limit is 18% of your previous year’s income, up to a maximum amount. For 2019 this maximum amount is $26,500! That is a lot of money to be able to put away year-over-year!
Similarly to TFSA’s, RRSP’s can hold multiple types of accounts within them, such as investments and cash. This gives you a large amount of versatility when decided how you want to invest your money to save for the future.
Finally, there are some major tax breaks that can be had by investing in an RRSP. The two most notable of these are the “Lifelong Learning Plan”, and the “Home Buyers’ Plan”.
The Lifelong Learning Plan (LLP) allows an individual to withdraw up to $10,000.00 a year, to a maximum of $20,000.00 to contribute to further post-secondary education. You then have up to two years after you finish school to pay it back!
My dad actually took advantage of this sweet tax exemption when he had to return to school during the depression and it did wonders. Unlike student loans you don’t pay interest on the money when you pay it back, and, unlike a normal withdrawal made from an RRSP, you don’t pay taxes or penalties on it.
The Home Buyers’ Plan (HBP) allows an individual to borrow up to $25,000 from their RRSP to invest in a home that they plan to live in. You then have 15 YEARS to pay it back!
Similarly to the LLP, the HBP doesn’t incur interest when you pay it back and doesn’t contribute to your taxes upon withdrawal.
Much like the TFSA, many of the situational aspects depend on when you intend to withdraw your money, and when you plan to pay taxes on it.
If you intend to withdraw money before your retirement, an RRSP can be quite costly between the fees charged by many financial institutions and the taxes imposed by the government on any withdrawals.
However, if you intend to keep that money in savings and instead pay taxes on the money earned after you retire when your income will be much lower, then putting away money in an RRSP can be a great way to save for retirement!
The largest disadvantage to an RRSP for most people is that if you withdraw from an RRSP before converting it to an RRIF (click the link for more info) you can incur harsh penalties and a very high tax rate.
IF YOU PLAN TO WITHDRAW CASH EARLY, DO NOT PUT IT IN AN RRSP.
This point can not be stressed enough!
Another disadvantage is that when your investments inevitably grow and accrue interest, this interest is taken into account also taxed as regular income upon the withdrawal of funds from an RRSP.
Finally, the age limit for continued contributions to an RRSP is 72. This means that by the final day of your 71st year you either have to convert your RRSP to a Registered Retirement Income Fund (RRIF), which will provide the income for you to live off of while retired or remove it all as cash.
There are advantages and disadvantages to converting an RRSP into an RRIf, but that will be covered in a later blog post.
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Where can I can an RRSP?
Similar to TFSA’s RRSP’s can be started at any of Canada’s five major banks, however, because of the variety in accounts that can be helpful within an RRSP I recommend going to your nearest financial institution and inquiring regarding the best option for you.
Do you currently have an RRSP? What made you get it?