Registered Retirement Savings Plan

An RRSP is a Canadian Registered Retirement Savings Plan. It is not technically an investment because it cannot be bought like a house or stock. Instead, money is put into it where investments can be purchased for tax-deferred growth. This plan is used for those who want to save a little on income taxes. This is also a good idea for those who want to save for their retirement.

As stated, the purpose of this retirement savings plan is to acquire the tax-deferred benefit and save for retirement. Investments within the account that make profits from dividends, interest and capital gains are not taxed as income. However, this isn’t to say that they are tax-free. The profits can still be taxed at a future date when they are withdrawn from the account. Contributing stops at age 69 but must be withdrawn in full or partially at the age of 71.

One benefit of contributing to a registered retirement savings plan is that you can reduce your taxable income. This is extremely useful for those who want to pay less on taxes or are just on the edge of the higher tax bracket. Typical contribution to an RRSP can range between 1% – 18% of previous years income. An individual makes an annual salary of $42,000.00, they can contribute 18% of their gross earnings to their RRSP. Effectively putting them into a lower tax bracket where they can reap the benefits of having a lower taxable income.

A lot of people would be wondering how they can contribute more money to their registered retirement savings plan (RRSP). In short, you are able to contribute more than 18%, this is called an over-contribution allowance. This is capped at $2,000.00 for a lifetime. An individual is then able to contribute an extra $40.00 for the one year then $50.00 the next until the full $2,000.00 is reached.

Although this may sound like good news, over-contributing can be a grave mistake many people make. If an individual contributes over their $2,000.00  allowance, they will be charged 1% tax on the amount over $2,000.00. This happens every single month until their next notice of assessment is received. After they can contribute their normal amount (not including the $2,000.00).

The spousal contribution may seem like a difficult concept to grasp but we will try to make it as simple as possible. Say there are a husband and wife, the wife makes 150,000.00 a year and the husband makes 35,000.00 a year. The wife only has 12% left in her RRSP contribution but her husband has a full 18% left. Instead of the husband contributing a full 18% out of his income to put himself into a lower tax bracket and save a bit of money when paying taxes. His wife can contribute her income to the retirement plan in his name instead.

By contributing to both, she’s effectively put herself into an even lower tax bracket. Since she has a higher income, being in this lower tax bracket effectively saves her more money on her taxable income than if her husband were to just contribute to his own RRSP and save on how much he would have to pay.

Before Contribution: husband pays $5,200.00, wife pays $33,500.00

After Contribution: husband pays: $4500.00, wife pays $32,000.00

Spousal Contribution: husband pays $5,200.00, wife pays $30,600.00                       

ALL NUMBERS ROUNDED FOR SIMPLICITY

As evident, if the husband contributed to his own he would save only $700.00 when paying his taxes, whereas if the wife contributed to both, the husband would have to pay that extra $700.00 but the wife effectively saves nearly $3,000.00 as appose to her original $1,500.00.

There are many investments that are allowed to be in an RRSP such as stocks, bonds, mutual funds, depository receipts, mortgages, income trusts, certain options, annuity contracts, royalty units and many more.