The registered retirement savings plan (RRSP) is one of the best tax deferred income plans. An RRSP allows you to save pre-tax “earned” income, within specific limits into registered plans. The amount contributed into an RRSP is deducted from your taxable income and thus saves you tax. Another tax saving benefit is that income earned in the RRSP is not taxed. However, any RRSP withdrawal will be added into your income and taxed for that year.
An RRSP is typically used for savings for retirement. It may also be used for saving for a down payment on a home or returning to school full-time. Because income earned within an RRSP is tax deferred until withdrawn, the longer the funs remain in your RRSP, the greater their growth when compared with funds invested outside the RRSP. So withdrawing RRSP funds for purposes other than retirement should be done as the last resort.
Your RRSP contribution limit is based on your prior year’s earned income. It is shown on the notice of assessment you receive after filing your previous year’s tax return. You can carry forward unused deduction room for a given year and use it in subsequent years.
Contributions are normally deductible from income for the purposes in the year they are made or a subsequent year. Contribution made in the first 60 days of the year is deductible in that year or tin the immediate preceding year. Excess contributions may be subject to penalty tax.
You can make contribution to a spousal RRSP. You are entitled to claim an RRSP contribution deduction for the amount contributed to the spousal plan. Spousal RRSP contributions are valuable for splitting retirement income since withdrawals are added into your spouse’s income.
Contributions to your RRSP may be made until the end of the calendar year in which you turn 69.
You are required to terminate your RRSP by the end of the year in which you turn age 69. There are three main options. First you can collapse the RRSP and include the total amount withdrawn in your annual income. Second, you can purchase an annuity that provides a regular income for a defined period. The annuity payments will be taxed as received. Third, you can transfer the accumulated RRSP funds into a RRIF from which a periodic retirement income is received and taxed.
