If you’re like many Canadians, you’re hoping you’ve paid enough tax in 2019 and may even be looking forward to a hefty tax refund. You can help ensure that happens by knowing the details of your Registered Retirement Savings Plan (RRSP), what sets them apart, your contribution limit and a whole slew of other things. Here are the basics:
What’s an RRSP?
An RRSP is a retirement savings plan that you open at a bank or other financial institution near you. It’s registered by the federal government of Canada, and you can contribute to it up to an annual maximum amount.
What’s special about RRSPs?
Contributions to RRSPs are deductible, meaning they can be used to reduce your taxes. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you withdraw money from the account.
Who can open an RRSP?
If you have earned income, have a social insurance number and have filed a tax return, you can contribute to an RRSP up until December 31 of the year your spouse turns 71.
What you can contribute?
Your allowable RRSP contribution for the current year is the lower amount of the following:
- 18% of your earned income from the previous tax year. For most people, earned income for RRSP purposes is the amount in box 14 of their T4 slips. Earning income also includes self-employed net income, CPP/QPP disability payments and net rental income, OR
- The maximum annual contribution limit for the taxation year MINUS any company sponsored pension plan contributions (defined as PA, or short for pension adjustment on your T4 slip. A PA represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan)
The RRSP deadline this year
The deadline for this year’s tax contribution is March 2, 2020. Contributions made in the first 60 days of the year can be applied against the previous taxation year or in any subsequent year.
The types of investments you can hold in an RRSP
You can simply make your contribution into an RRSP savings account until it builds to several thousand dollars, or you can set up a self-directed RRSP right away. If you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments, you should consider a good balanced fund or even an easy passive strategy we call the Couch Potato Portfolio. (You can find it here.)
You can hold the following types of investments inside your RRSP:
- Cash (money)
- Guaranteed Investment Certificates (GICs)
- Exchange-Traded Funds (ETFs)
- Mutual funds
- Real estate investment trusts (REITs)
- Bonds (both corporate and government-issued)
- Stocks (securities) that are listed on a designated exchange
How and where do I open an RRSP account?
You can choose to open an RRSP with a bank or credit union, which can be a good option for those who want the option of speaking with someone face-to-face. In addition, many financial institutions, including some discount brokers and robo-advisors, such as Questrade or Wealthsimple, allow you to set up and manage your own RRSP account in minutes online, from the comfort of your couch. Have your social insurance number (SIN) and another piece of identification ready. You’ll need to transfer funds from an existing account in order to make your first contribution or set up regular direct deposits. If you’re the kind of person who’s always racing to beat the contribution deadline, the latter can make your life easy—it’s a set-it-and-forget-it strategy that ensures you always have a contribution ready for the current tax year.
The maximum someone can contribute
For 2020 the contribution limit is $27,230. For 2019 the limit was $26,500.
What’s unused/carry forward contribution room?
RRSP contribution room accumulated after 1990 can be carried forward to another year. If you aren’t able to top up your RRSP contribution this year, you are allowed to make up the difference in a later year.
How to find out your own contribution limit
After Canada Revenue Agency processes your tax return, CRA sends a Notice of Assessment, which includes your next years’ contribution limit. This notice also shows your unused contribution room. You can also call your local Tax Information Phone Systems (TIPS) number, and be sure to have your SIN and previous tax return ready. Alternatively, you can register for My Account with CRA to view your RRSP limit as well as track your refund, make updates to your return and monitor payments.
Can I only put in cash?
No. You can contribute a stock or other security that you already own outside your RRSP. This is called a contribution “in kind.” The “in kind” contribution is equal to the fair market value of the security when contributed. The security is deemed to have been disposed of at time of contribution. (Realize that this can have tax consequences.)
What is a spousal RRSP?
All or a portion of your RRSP contribution can be made to an RRSP in your spouse’s name. As the contributor, you get the deduction, but your spouse is the owner of the plan. This includes common-law spouses as defined by the CRA.
Who gets the most benefit from an RRSP?
The benefit is greatest if a higher-income spouse or common-law partner contributes to an RRSP for a lower-income spouse or common-law partner. The contributor receives the short term benefit of the tax deduction for the contributions, while the annuitant, who is likely to be in a lower tax bracket during retirement, receives the income and reports it on his or her income tax and benefits return.
What else you can use your RRSP money for?
There are two programs you can use to take money out of an RRSP plan without incurring tax. They are the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP). With the HBP you can take up to $25,000 out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. But you’ll have to pay it back into your RRSP over the next 15 years. With the LLP, the rules are slightly differently. You can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your or your spouse’s education. You can’t use it for your child’s education. All you have to do is repay at least 10% per year for up to 10 years. Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid in 10 years.
What kind of refund to expect?
We’ve run the numbers to see what kind of refund you can expect to pay if you’re a salaried employee with no company pension. These numbers were run based on Ontario tax rates and assume you have paid federal and provincial taxes all year long. They also assume you have made the maximum RRSP contribution of 18% of last year’s income for your salary level, or the maximum allowed, as in the case of the $150,000 earned income example.
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Use this simple tax calculator from EY to estimate the tax savings that different contribution amounts will generate on your 2019 tax return (which, for most people, is due by April 30, 2020).