WHAT CANADIAN’s NEED TO KNOW ABOUT RRSP?

WHAT IS RRSP?

RRSP stands for Registered Retirement Savings Plan.

It is the best way to save taxes on your personal income. You do not have to pay any taxes on the amount you put in an RRSP Account, but you will be taxed at the time you withdraw money from this account.

An RRSP account is just like a bucket and you can put any kind of investment inside that bucket, it can be Index Funds, Mutual Funds, GIC or simply High Interest Saving account type.

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WHY TO INVEST IN RRSP ACCOUNT IF YOU MUST PAY TAX AT WITHDRAWAL ANYWAY?

1.      Main idea behind investing in an RRSP account is to invest now and withdraw at the time of retirement. It is a basic assumption that if you are working full time now and have much higher income, you will not be working at the time of retirement and will have much lower yearly income. As a result, you are in a higher tax bracket right now and will be in a lower tax bracket in future during retirement. This means you will pay much less tax on the money at the time of withdrawal.

2.      Second big benefit, you are able to save taxes now and you are putting that savings in your RRSP account which will build up into a big amount over time and it will help you during your retirement. You were going to pay tax and money would be gone anyway, so instead you are able to save part of that and invest for your future.

3.      This system is making you save for your future. There are a lot of people who never invest and having this option makes it attractive to save and invest.

RRSP vs TFSA

RRSP stands for Registered Retirement Savings Plan. It means No Taxes at the Deposit; But Taxed at Withdrawal.

You save some money now because any money gone to the RRSP account is TAX FREE but it doesn’t mean that you won’t pay taxes. You will pay taxes at the time you withdraw that money.

TFSA means Deposit is done with after-tax money and no taxes on withdrawal. You will pay your taxes as you normally do and you will deposit after-tax money to your TFSA account.

Just imagine you are investing $5000 every year in TFSA for 30 years and it grows to $676,000 (at 8%) over time, now you DO NOT have to pay any taxes on this money. TA DA!

Now imagine putting the same money $6000 ($1,000 more because you save money by not paying taxes) in RRSP for 30 year and it grows to $810,000 dollars over time. It is $125,000 more but you must pay taxes on a total of $810,000 during the retirement period. I don’t know about you, but I would take the deal with NO TAXES.

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HOW RRSP CONTRIBUTION LIMIT IS CALCULATED?

It is calculated based on your last year income, it’s 18% of your earned income of preceding year up to contribution limit fixed by CRA.

Examples:

Person 1: Previous year income = $100,000 will be allowed to put $18,000 in RRSP

Person 2: Previous year income = $200,000 will be allowed a maximum of $27,830 in RRSP.

Here below are the examples of the maximum contribution limit of the last 3 years.

For 2021 the RRSP contribution limit is $27,830.

For 2020, it is $27,230; and

For 2019 the limit was $26,500

DOES RRSP CONTRIBUTION CARRIES FORWARD IF NOT USED FULLY OR PARTIALLY?

Yes, any contribution room available in RRSP carries forward to next year if not used fully\partially.

Sometimes, we can expect higher income in the coming year from the sale of stocks or secondary homes, we can keep our extra RRSP room available for those years to reduce tax burden.

AT WHAT AGE SHOULD YOU OPEN A RRSP ACCOUNT?

Ideally, earlier the better. There is no age restriction, you can start investing under an RRSP account as soon as you are eligible to pay taxes.

Time is money, don’t forget that.

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I AM 23 AND MAKING $35K PER YEAR, IS RRSP FOR ME?

The main purpose of RRSP is to reduce your taxes now. Putting a certain amount in RRSP at a young age when you are only making $35 does not fulfill that purpose.

I think people should start putting money in a TFSA account instead of RRSP at the earlier years because there will not be much tax savings at this point. A TFSA account will save you from future tax bills. It will make a big difference when you don’t have to pay any taxes on the growth of your money.

Sometimes, the difference between RICH and POOR is just how they manage their investment and how much tax they pay. Always pay attention to taxes.

WHAT ARE THE MAIN KEY POINTS ONE SHOULD LOOK UP WHILE OPENING RRSP?

1. Find out your available RRSP contribution limit.

2. How you want to invest your money inside RRPS. You should find out your risk level and decide how you like to invest your money. Just do not get into analysis paralysis mode and never start the investment. Start something small and invest in something you understand and then gradually increase your risk level.

I JUST MOVED TO CANADA; CAN I START INVESTING IN RRSP?

One of the main criteria to calculate your RRSP contribution is based on your last year’s income. If you just moved to Canada, then you may not have any income for last year yet. This means you should wait for another year to start investing in RRSP. Meanwhile, you can start investing in a TFSA account.

You should keep investing in TFSA till your income is low. You should start investing in RRSP when your income increases, and you know that it can help you to save on taxes.

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CAN INTERNATIONAL STUDENTS OR TEMPORARY WORKERS OPEN RRSP IN CANADA?

Temporary residents on work permit or International students living in Canada with valid SIN numbers can open an RRSP account as well. It will not make any sense to invest in an RRSP account if you are planning to leave the country at some point. If you have moved to Canada to live forever, then you can start investing in RRSP once you have a contribution available.

Best option is always to invest in TFSA if you are not sure whether you will stay in Canada long enough.

Are there any monthly or yearly fees to manage RRSP?

There is no direct fee to open or manage RRSP but there must be some fees associated with the investments done under RRSP account. This fee can vary from one investment to another but mind you, those investment related fees will always be there regardless how and where you invest your money. You can reduce your fees by choosing the right investment (For example, Index funds have much lower fees over Mutual funds).

WHAT IS THE MINIMUM INVESTMENT REQUIRED?

There is no minimum investment requirement, you can invest as small as you can, but sometimes your investment like stocks or Mutual funds may have some minimum requirements to invest in certain funds.

WHAT HAPPENS IF YOU INVEST MORE THAN YOUR RRSP DEDUCTION LIMIT?

You can contribute up to an extra $2,000 over the Deduction limit, having this $2,000 extra room available can help you to get started when you do not have any deduction limit available.

There is a penalty of 1% for each month for any extra contribution over $2,000 in your RRSP account. Ideally, you should wait till next year to have an extra contribution room available for you instead of over contributing.

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CAN YOU WITHDRAW MONEY FROM RRSP ANYTIME?

RRSP is not as flexible as a TFSA account.

Your bank or financial institution will withhold the taxes if you want to withdraw the money from an RRSP account before age of Retirement. This amount will be paid to the government for the tax deductions, this amount will not be exact or enough to cover all the taxes from withdrawal and it will be adjusted once you will file for taxes.

In the province of Quebec, banks will withhold provincial taxes as well.

• 10% (5% in Quebec) on amounts up to $5,000.
• 20% (10% in Quebec) on amounts over $5,000 up to including $15,000.
• 30% (15% in Quebec) on amounts over $15,000.

CAN YOU WITHDRAW MONEY FROM AN RRSP ACCOUNT TO BUY A HOUSE OR FOR EMERGENCIES?

Home buyer Plan (First House Purchase) – You can withdraw money from an RRSP account without getting taxed to buy your first house. You will have to pay that money back in the next 15 years, you must start depositing money back to RRSP yearly otherwise some fixed amount will be added back to your income.

There is also a withdrawal limit, as of 2019 you should be able to withdraw from RRSP up to $35,000.

You must meet certain conditions to qualify to withdraw from the RRSP account.

Emergencies –You can withdraw money for emergencies, but your bank will withhold the tax as we covered in previous point.

Sometimes, it can be a good idea to withdraw from RRSP if you are not working for some time in a year to cover your expenses. Bank will withhold taxes anyway, but you can get it back if your income for that year stays low.

HOW CAN YOU OPEN YOUR RRSP ACCOUNT?

Opening a RRSP account is a walk in the park, it is so easy, it’s almost the same as opening any savings or checking account at your local bank.

But the main thing to decide for you is how you will be investing your money inside a RRSP account. For some people, the investing part gets very confusing sometimes, they find it so difficult to make up their mind.

My suggestion is you should just start. Investing is ongoing learning; you can start with any kind of investment and then just try to improve it every year by learning little more and becoming more aggressive. I started my investment with $25 per month and it went up close to $1,000 per month at some point. It’s a gradual process.

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WHAT HAPPENS AT THE TIME OF DEATH OF THE RRSP ACCOUNT HOLDER?

No one really wants to be there, but it is the fact that we will die someday. It’s good to know what really happens to your hard-earned money once you die.

People can be in two situations either Matured RRSP or Unmatured RRSP.

Matured RRSP

In case of Matured RRSP (It means person, who died was already retired and using the RRSP account benefits.), surviving beneficiaries (Spouse or Common-law partner) will start receiving the exact same payments or benefits. Surviving beneficiaries must talk to their financial institute or their accountant to get things in order. There is also the possibility of electing an estate to receive the paid amounts.

Unmature RRSP

In case Unmatured RRSP (It means person died before reaching the retirement age), in this case all the RRSP holding can be transferred to surviving beneficiary’s (spouse or common-law partner) RRSP account. These are very tricky moves, you must consult with your accountant to understand how this works.

Added to Income

1.      All the RRSP holding will be counted towards deceased person income for that year if there is no surviving spouse or common-law partner as surviving beneficiary.

2.      As a general rule, If the deceased person is a participant of the home buyer plan, then the remaining home buyer plan amount will be added to the deceased person’s income for that year.

WHEN SHOULD I CHOOSE RRSP OVER TFSA?

Two scenarios’ for considering RRSP over TFSA.

1.      You have very high personal income; we are talking about above $100,000 – $150,000 per year because RRSP helps you to save on your taxes significantly.

2.      Your employer matches the contribution to your RRSP account, it’s free money and no one should leave it for any reason.

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IS RRSP RIGHT FOR YOU?

This is one of the main questions you should be asking, is it right for you?

My 2 cents, I prefer TFSA.

Personally, I prefer all my stock investments to be done under a TFSA account to save taxes in future.

Here is another good reason to invest in TFSA, you will have to withdraw money yearly from your RRSP account then you will need to pay taxes and the government will give you less social security incentive because you have a steady income coming from RRSP. While withdrawing from TFSA does not have any taxable income and no issues with social security benefits.

Taxes keep on increasing anyway, who knows how much taxes we will be paying in future, I would invest in TFSA which saves me future taxes.

WHAT DO YOU WANT?

Do you want to save taxes now and pay later? Or you don’t care about taxes right now and save taxes in future using TFSA?

Another thing to consider, you may have other sources of income like business, Investment properties, Stocks, Government Pension, so it means you will not be saving a lot of taxes in future either. If you have a lot of other investments and are going to have decent income from these sources, then you can consider putting money first in TFSA and if you still have more money, then put it in RRSP.

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RRSP ACCOUNT IS PROTECTED FROM CREDITORS AND BANKRUPTCY

Have you ever thought about this? It is a big one. No matter what, you can have some backup money available in an RRSP account.

The Federal BIA provides protection from creditors for assets held under RRSP and RRIF accounts. There are always some if’s and but’s, it may not save you from every situation but still there is some level of protection for RRSP accounts if you go for bankruptcy. For this reason, I am always keeping some money in an RRSP account to be safe.

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