If you are interested in saving for your retirement the first thing you should consider is the reasons why you should open a Registered Retirement Savings Plan (RRSP). There are great benefits for opening a Registered Retirement Savings Plan (RRSP). Not only is it a great account that you can use to save for retirement, but it can also be loaded with investments and best of all, it is tax deductible. This blog will cover the various reasons why you should open a Registered Retirement Savings Plan (RRSP).
What is a Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is an authorized savings account created by the government over half a century ago. It is a tax-advantaged retirement savings plan and in the ideal scenario you should be making contributions to your RRSP throughout your life, then convert it to a Registered Retirement Income Fund (RRIF) or an annuity, or a lump-sum withdrawal when you retire. You can also take money out of your RRSP to pay for college or to buy your first home. The RRSP is a fantastic way to save money for your future retirement plans while also reducing your current taxes. You can contribute to this account until you are 71 years of age and withdraw the money and transfer it into a Registered Retirement Income Fund (RRIF) as early as 55 years old.
Reason #1: Saving for your retirement with a Registered Retirement Savings Plan (RRSP)
The main reason why you should open a Registered Retirement Savings Plan (RRSP) is because you are encouraged to save up money for your retirement. Canadians are not the best at saving for their retirement, and this is a major problem because when you are retired you can be financially vulnerable and you can burden yourself and your loved ones if you are not properly prepared to retire. Considering the fact that after you retire, you probably will be spending around 70-80% of your pre-retirement amount, it is quite a considerable amount that you should have saved for your retirement. This being said, a Registered Retirement Savings Plan (RRSP) is amazing to help you build your retirement savings and it can definitely help you just by contributing to it because of the tax deduction which we will discuss later. Overall, it is highly recommended that you open a Registered Retirement Savings Plan (RRSP) simply due to the fact that it is a method to save for your retirement.
Reason #2: Investing with a Registered Retirement Savings Plan (RRSP)
Another reason you should open a Registered Retirement Savings Plan (RRSP) is because of the fact that it can be loaded with multiple investment options. The Registered Retirement Savings Plan (RRSP) can hold the same investments as the TFSA plus more, this means that you can use your RRSP to invest into:
- Mutual funds
- ETFs and more!
These investments are extremely important to have in your RRSP account, the reason why is because you can gather exponential tax-deferred growth if you let your savings grow for years or even decades prior to your retirement.
It is a great idea to open up your RRSP at a young age, the reason why is because you can be contributing to this account for decades as well as investing with it for decades which can provide you profit based on dividends, interest, and investment income. Let’s just look into the power of investing, if you invest $100 into your RRSP per month, then you can easily gather over $12,000 in value just from your contributions in 10 years, but with investments that are generating an annual rate of return of 4% compounded annually then your investments will generate an additional $2,983.62 in income, overall your RRSP value will be $16,183.62 due to compounding. This is just a small investment of $100 per month, say you start this account in your early 20s, or mid 20s and contribute more as you start earning more money, then your growth can really add up!
Reason #3: Generate RRSP savings for you and your partner
The RRSP is a great tool to help build retirement savings for yourself and your partner. A spousal RRSP is one that is set up in your name or the name of your partner. The investments in the RRSP are owned by them, but you make contributions. Any contributions you make to a spousal RRSP are tax deductible and will increase your annual RRSP tax deduction. They won’t have an impact on how much money your spouse can put into their own RRSP allowing you and your spouse to divide retirement income more fairly. Therefore, your combined income tax as a couple may be less than it would be if all of your savings were concentrated in a single RRSP. If you make more money than your spouse and you’re likely to be in a higher tax bracket when you both retire, you might want to do this. Alternatively, it is also a great option if your spouse is unemployed and you have a pension plan.
Reason #4: Use your RRSP savings before you’re retired
People can use their RRSP in a few different ways both before and after retirement. You can use your RRSP before retiring to pay for your first home with the Home Buyers Plan (HBP) or to further your education with the Lifelong Learners Plan (LLP).
Lifelong Learners Plan
The Lifelong Learners Plan allows you to withdraw money from your RRSP for educational purposes such as getting a diploma, certificate or degree, or getting more education or training. You can withdraw $10,000 from this plan each year, up to a maximum of $20,000. Within ten years of your withdrawal, you must put the money back into your RRSP under this plan. It roughly equates to paying one-tenth of the annual withdrawal total. You should also create a repayment schedule and plan with your bank to make sure that you aren’t missing out on payments, but more importantly if you do not return the money that you withdrew, it will be considered income and you can be taxed, so make sure you avoid late payments. An example of getting taxed would be: if you need to repay $3,500 but only repaid $2,000 that year, then the government will consider the remaining $1,500 as income and you will need to pay income tax on that amount.
Home Buyers’ Plan
Another fantastic way to use your RRSP before retirement is the Home Buyers’ Plan (HBP). With this program, you are able to borrow up to $35,000 tax-free to use as a down payment on a home. This is a fantastic way to significantly increase your down payment, and it’s even better if your partner has an RRSP. If your partner is also a first-time home buyer, they can also borrow up to $35,000 tax free from their own RRSP for the down payment, making a total tax-free borrowing capacity of $70,000 if you and your partner both participate in the HBP! You have 15 years from the time you withdraw the funds to make payments and return the borrowed funds or else you risk getting taxed so please set up a payment schedule with your bank.
This is what you need in order to be eligible for the HBP: As long as the money you intend to withdraw has been in your account for 90 days prior to taking it out, the Home Buyers’ Plan is valid. The withdrawal must then be scheduled with your bank using the T1036 Form from the Canada Revenue Agency. When you file your taxes in the year that you withdraw the money, you will need to refer to these forms. Additionally, you must withdraw the money within 30 days of receiving the title to a home; if you wait longer, you will not be qualified for the HBP.
These are important reasons why you should open a RRSP especially if you are a young adult who is interested in going to get more education in the future or are looking to purchase your first home one day.
Reason #5: The Registered Retirement Savings Plan (RRSP) is tax-deductible
This is by far one of the most attractive features of the Registered Retirement Savings Plan (RRSP) which is extremely beneficial to you prior to retiring. The RRSP encourages you to save and to build retirement savings because it offers you a tax deduction on your income tax of the amount you have contributed into your RRSP. When you file your tax return, the contributions you made to your RRSP will be subtracted from your income. In the end, you can drastically reduce the amount of income that is taxable on your tax return by 18% or up to $29,210. In comparison to non-registered retirement savings accounts, this is one of the most distinctive features of the RRSP, which greatly increases its appeal. It is a win-win situation because you are essentially saving for your future retirement plans and lowering the taxes you might be charged right now. This can greatly impact you because if you are in a mid to high tax bracket, then you can definitely soften the impact that taxes can have on your income. Take a look at these tax brackets in Ontario:
Reason #6: The Registered Retirement Savings Plan (RRSP) can be an emergency savings account
Although we strongly encourage you to have an alternative emergency savings account set aside in a savings account or in a Tax-free savings account (TFSA). As long as your money is not in a locked-in plan, you are free to withdraw funds from your RRSP whenever you want. The withdrawal is subject to tax, and you must report the sum as income on your tax return. This money should only be withdrawn as an emergency withdrawal, and you should be aware of the consequences of withdrawing money from your RRSP. You could be charged the withholding tax upfront when withdrawing the money. This being said, of course it is not ideal to withdraw money from the RRSP but knowing that you have money saved up in the RRSP can give you peace of mind in the case that you have to withdraw from in an emergency situation. This is why you should open a Registered Retirement Savings Plan (RRSP) because of the fact that it can be used as an emergency savings account if it really comes down to you needing access to money immediately. Another great emergency savings account is the Tax-free savings account (TFSA) so if you don’t have one yet look into the reasons why you need to open one now!
Reason #7: The contribution limit can supplement your retirement savings
The contribution limit of a Registered Retirement Savings Plan (RRSP) is a huge benefit for those who want to maximize their tax deduction amount and those who are dedicated to saving up for their retirement. The maximum contribution amount for the RRSP in 2022 was $29,210 or 18% of your annual income, whichever amount is lower. The maximum contribution amount for 2023 is going to be $30,780 or 18% of your annual income, whichever is lower.
What is awesome about this is the fact that the annual contribution deadline for your RRSP is up until usually the beginning of March of the next year and these contributions will be applied to the prior years income tax deduction. For example: The contributions that you make towards your RRSP up until March 1st, 2023 will be applied to your tax deductions for your 2022 taxes.
This contribution limit is great because it is fairly large and can definitely help you grow a comfortable retirement savings amount if you are maximizing your RRSP. Even if you don’t maximize your RRSP, keep in mind that you can carry over unused amounts to the next year and you can hold off on tax deductions on your income if you want to benefit from a greater tax saving if you know your income might increase in the future.
Reason #8: Your RRSP give you guaranteed payments when you retire
When you retire you should transfer your RRSP into a RRIF, LIF, annuity, or withdraw a lump-sum prior to the age of 71. This allows you to receive payments based on a schedule that you set up with your financial institution. These all offer different benefits. Take a look at the various different kinds of retirement income accounts. We strongly recommend that you talk to our retirement planning experts to find out what would be the best plan for you if you are close to retirement and want to get your guaranteed payments to begin! These secured payments is one of main reasons why you should open a RRSP.
Overall, there are many different ways to use your RRSP either before or after retiring – see the photo below for an overview of different uses for your RRSP:
Frequently Asked Questions (FAQs) about the Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement savings plan; it has tax-deferred benefits and can be used to hold investments. As long as the income earned stays in the account, you won’t be taxed on it. Your RRSP contributions are deductible from your taxes. There is a cap on the annual amount that can be contributed to an RRSP; for 2023, it is $30,780 for 2022, it is $29,210, and for 2021, it was $27,830. 18% of your income or the annual contribution limit, whichever is lower, can also be the cap on the maximum contribution amount. If you haven’t made annual contributions in full over the years, there is also the carried over contribution room.
- Individual RRSP: The most common type of RRSP that you set up for yourself and make regular contributions to.
- Self-directed RRSP: This is an RRSP where you invest the savings by yourself or with a broker. This is for people who are willing to take more risk with their retirement savings as they have more personal control over their investments.
- Group RRSP: Group RRSP are created by employers, they are basically a collection of individual RRSP’s. You can choose to be enrolled in the group RRSP if your employer offers this option and you will have your contributions toward this RRSP deducted from your taxable income (your paycheque) immediately.
- Spousal RRSP: If you make a spousal RRSP, by contributing to the spousal RRSP, you will get you the tax deduction but the plan is registered in your spouse’s name therefore they are entitled to the accumulated savings.
The main reason why you should have an RRSP account is to save for your retirement, but the other great reason to have an RRSP account is to have the amount you contributed deducted from your annual income for tax purposes and you can generate income off of investments made with the RRSP account.
Truthfully, you can access your RRSP at any time; however, most people do so when they retire or are about to retire. If you take a lump sum withdrawal before the account reaches maturity at age 71 or if you don’t convert it to an RRIF or annuity when you retire, there will be a tax penalty.
In this case, your RRSP contribution limit will be reduced based on the amount of your employee-sponsored pension. The pension adjustment can be found on your T4.
The contribution limit in 2022 is $29,210 and the contribution limit in 2021 was $27,830. Alternatively, the maximum amount you can contribute is 18% of your income or the maximum contribution amount, whatever is least.
The contribution limit in 2023 is $30,780 and the contribution limit in 2022 was $29,210. Alternatively, the maximum amount you can contribute is 18% of your income or the maximum contribution amount, whatever is least.
Yes, your RRSP contributions are tax-deductible meaning that you can deduct your annual contribution amount when you file your taxes for that year.
The deadline for your 2022 RRSP contributions is March 1st, 2023. This means that whatever you contribute to your RRSP prior to March 1st, 2023 will be available for you to deduct from your 2022 income taxes. So make sure you contribute as much as you can before March 1st!
The younger the better, but even with that being said, it is better late than never. Being that anyone from 0 to 71 years old can make an RRSP, it is best to talk to a financial advisor and see if starting a RRSP is a good decision for you.
There are 3 popular options when withdrawing your money from your RRSP, you can withdraw it in cash, convert it into an RRIF, or buy an annuity.
- You can withdraw all the money in your account as you wish, but taking out a lump sum in cash will lead to the lump sum amount being taxed heavily.
- Converting it into an RRIF will allow you to continue to save your money and allow for growth as well. The RRIF is also tax-deferred and you must withdraw a certain amount from the RRIF per year, if you withdraw more than the specified amount you will be taxed.
- If you decide to buy an annuity, you will be provided with income for life, or until the age 90 years old. You will be taxed upon receiving the payments.
Thinking of planning your retirement?
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