10 things you need to know about RRSPs

By Sheryl Smolkin

It seems like registered retirement savings plans have been around forever. They were initially introduced in 1957 to promote savings for retirement by employees and self-employed people.

Over the years since there have been changes to the program, primarily in the form of increased contribution limits both as a percent of earned income and as an increase in the maximum allowable deduction.

If you have an RRSP or are considering opening one, you may think you are well-informed about the program. However, here are 10 things about RRSPs you may find interesting.

  1. Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which contributions are made. Most withdrawals are taxed as income when they are withdrawn. This is the same tax treatment provided to Registered Pension Plans established by employers.
  2. No income earned in the account is taxed (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.).
  3. You can set up an individual RRSP for yourself; a spousal RRSP using your RRSP room that will trigger income in your spouse’s name when funds are withdrawn; or, become a member of a group RRSP established by your employer or an affinity group.
  4. Contributing more than $2,000 over your deduction limit is subject to a significant penalty tax (1% per month on the overage amount).
  5. You can withdraw dollars or assets from an RRSP at any age. Withholding tax is deducted by the institution managing the account. Amounts withdrawn must be included in your taxable income for that year. The tax withheld reduces the taxes owing at year end. There are two exceptions to this process – the Home Buyer’s Plan and the Lifelong Learning Plan.
  6. Contributing to an RRSP is not enough. In order to meet your retirement savings goals you need to decide which of the myriad of investment instruments in which you will invest the money in your account and monitor results over time. Both independent financial advisors and advisors employed by financial institutions can help you come up with a plan.
  7. Almost all financial institutions and brokerage houses will be happy to set up a monthly automatic withdrawal program so you don’t have to come up with a big lump sum at the end of the year. They can also reduce your tax withholdings on an ongoing basis so the impact of monthly reductions to your salary is much less.
  8. If you have a defined benefit or defined contribution pension plan, your RRSP room will be reduced. However, if the expected pension you will receive from your company is lower than the income replacement you will require to live in retirement, you should still be saving additional amounts in an RRSP.
  9. Unused RRSP room is a great way to tax-shelter unexpected lump sums like an inheritance, an award for wrongful dismissal or a bonus.
  10. You may wish to borrow money to make RRSP contributions. However, if the interest rate on the loan is greater on the expected return in your RRSP and you can’t afford to pay the loan back on time this would likely not be a wise financial decision. See other possible strategies for borrowing to invest in an RRSP.

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