RRSP Registered Retirement Savings Plan Canada

RRSP Registered Retirement Savings Plan Canada

A Registered Retirement Savings Plan (RRSP) is a tax-deferred account designed specifically for retirement savings. Any resident of Canada under the age of 71 who has earned income may establish and contribute to an RRSP.

Why Contribute to RRSP's?

Most Canadians contribute to an RRSP to lower their tax bill. But there are many other benefits to consider:

  • Immediate Tax Savings: your allowable contributions are tax deductible from your annual income
  • Lifelong Learning Plan: you can use up to $20,000 of your RRSP to pay for your own or your common-law partner's education. If certain conditions are met, the withdrawal is tax-free and can be paid back to your RRSPs over ten years.

Common Registered Retirement Savings Plan (RRSP) Mistakes

 Here are the common mistakes many Canadians make when contributing to Registered Retirement Savings Plan (RRSP) which can also be used as Home buyer plan for first time home buyers in Canada.

 Proper Reporting

Receipts for contributions in the first 60 days of 2011 properly belong on your 2010 tax return. Receipts for the first 60 days of 2012 count as 2011 contributions of Registered Retirement Savings Plan (RRSP)

Do not hold them back to claim them on your 2012 tax return.

Reporting RRSP contributions on a calendar year basis is technically incorrect. According to Schedule 7 of your 2011 tax return, Canadians should be reporting the contributions you make from March 2, 2011 to Feb. 29, 2012.

You must be over 18 to contribute to an RRSP.

You must be 18 to open a TFSA but you can contribute at any age. Kids under 18 who earn money through part-time or summer jobs should be encouraged to file a tax return to demonstrate their earned income to the Canada Revenue Agency, creating RRSP contribution room. They can then choose to either make an RRSP contribution with their summer earnings or, at the very least, build up that RRSP contribution room for use in future years.

 Defined Contribution Pension  

Note that deposits to a defined contribution - or DC - pension plan made in 2011 do not use up any of your 2011 RRSP contribution room. A pension plan member does not get any receipt to deduct 2011 DC contributions on line 207 for RRSPs.

Instead, the calendar-year total for an employee's own DC plan contributions will appear in Box 20 of the 2011 T4 slip, which means they can be claimed as a deduction on line 208 as Registered Pension Plan contributions. Furthermore, the total of employee plus employer matching RPP contributions becomes a Pension Adjustment amount shown in Box 52 of the T4 slip. In turn, this PA reduces the employee's 2012 RRSP contribution room.

If you're over 71, you can no longer contribute to an RRSP.

While it may be true that you can no longer contribute to your own RRSP once over 71, you can still contribute to a spousal RRSP if you have younger spouse. This would only be applicable if you have an RRSP contribution room, either because you haven't contributed the maximum allowed during your working years or you generate new room annually from employment or rental income, both of which count as "earned income."

Over Contribution

The penalty for RRSP over contributions in excess of $2,000 is 1%  per month. Completing a T1OVP form to calculate this onerous penalty is a chore most accountants detest.

The problem compounds itself when you ignore the amount of unused RRSP contributions shown at the very bottom of your 2010 Notice of Assessment. Those who inadvertently over contribute usually do so when they make their top-up RRSP contributions in the first 60 days of the calendar year.

Find this key number immediately below the line that tells you how much to deduct for 2011.

You must report and claim your RRSP

Contribution annually or face a penalty tax of 1% per month.

While you do need to report all 2011 RRSP contributions (including those made in the first 60 days of 2012) on your 2011 tax return, you do not need to claim the deduction in the year they are made. Provided you have the necessary RRSP room, you will not be penalized for over contributing if you don't claim the deduction. That being said, it rarely makes sense to defer claiming the deduction unless you are certain that your marginal tax rate for a coming year will be significantly higher.

High Interest Loan

Don't use a credit card or high interest loans cash advance to fund your RRSP contribution. Assuming a 35 % tax bracket, paying 18-24% credit card interest after-tax is equivalent to a 30 per cent cost before tax. In other words, your RRSP needs a guaranteed 30 % RRSP growth rate to make a credit card RRSP loan worthwhile.

RRSP loan logic is simple. Top up your RRSP with money you borrow. Use the refund to pay down the loan and reduce the time it takes to pay it back. The invested money starts working immediately.

Borrowing at 18-24% to contribute to an RRSP is a bad idea. But that is effectively what you are doing when you use available cash to make an RRSP contribution while you still have an outstanding credit card balance.

Last minute contribution

Putting it off each year and then planning to really save at a later date. The key factor as an investor is time and the compounding growth. Investing a small amount earlier may help you retire earlier. If you have the cash and the RRSP room, speak to your accountant, financial advisor or bank about making your 2011 RRSP contribution.

Not naming a beneficiary

Your spouse can receive your RRSP tax-free and you can name a charity (with certain provisions) as beneficiary as well.

RRSP loan rates are very low so you won't pay a lot of interest over the term of an RRSP loan. However, the tax refund that you can receive when you use your RRSP loan to make even a small RRSP contribution is usually much more - even 10 times more! – compared to the interest that you'll pay on the loan. In addition, you'll earn interest on your RRSP investment!

RRSP Catch Up Loans

Borrowing to maximize your RRSP contribution usually leaves you further ahead than making a smaller contribution without a loan. Even though interest on an RRSP loan is not tax deductible, the combination of low borrowing rates and paying off the RRSP loan within one year will result in more total assets.

Options to Invest RRSP

Common types of qualified investments for RRSP money are, guaranteed investment certificates (GICs), government and corporate bonds, mutual funds, and securities listed on a designated stock exchange. You can also invest in Canadian Mortgages as well syndicate mortgages.

RRSPs are better than TFSAs since you only get a tax deduction when you contribute to an RRSP, not a TFSA.

Sure, you get a tax deduction and potential refund when you make a deductible RRSP contribution but that's only potentially beneficial to you if you expect your marginal effective tax rate upon withdrawal of the funds to be lower than your tax rate today. In other words, that "refund" you receive in respect to your contribution is meaningless if your tax rate stays constant between the time of contribution and withdrawal. If your tax rate is expected to increase upon retirement, you would have been better off socking the money away in a TFSA before considering an RRSP contribution.

Don’t Let taxman use your money Interest free
If you are making regular deposits to your RRSP (e.g. monthly PAC deposits), you can complete and file a TD1 or T1213 to reduce the taxes withheld from your pay cheque. This allows your employer to deduct your RRSP contribution amount from your income, before income taxes are calculated, giving you an instant tax deduction. Why let the government use your money interest free? 

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Navtaj Chandhoke
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