A Registered Retirement Savings Plan (RRSP) is a popular retirement savings option across Canada.
When you establish an RRSP, you’re in control. There are certain requirements and guidelines of course, like RRSP contribution limits and types of allowable investment options. However, these rules still let you take the lead in your retirement planning.
An RRSP has certain tax advantages. These can give you a benefit each year you make contributions. You may also see tax savings when you retire and begin to take money out of the account.
There’s a lot to consider with these accounts, from planning RRSP contributions to understanding the tax benefits. Let’s take a closer look.
What are the benefits of an RRSP?
Access is a very basic and important advantage when it comes to RRSPs. Anyone age 71 or younger who earns income from a job and submits a tax return can open one. Additionally, you can open an RRSP yourself or with your spouse or common-law partner.
There aren’t any other major limits when it comes to RRSP eligibility. That means just about anyone in the workforce can start saving for their retirement.
The major reason why Canadians choose RRSPs relates to tax advantages. There are a few distinct benefits to consider:
- Contributions are tax-deductible. When you contribute money to your RRSP, you can deduct those funds from your total taxable income. That can mean a lower tax burden each year you contribute to your RRSP. It’s a big advantage over putting money in a savings account or making a normal investment.
- Investment income grows on a tax-deferred basis. Money and investments in your RRSP won’t be taxed until it’s withdrawn. This is an opportunity to let investments grow tax-free for long periods of time.
- Retirement vs. employed tax rates can work in your favour. Marginal tax rates tend to be lower for retired people as opposed to those actively working. What happens if you wait until you’re retired to take money out of your RRSP? You can potentially save money through a lower tax rate.
Here’s another benefit that isn’t as centred on taxes. Money can be moved from RRSP at any time without any additional fees or penalties. You’ll have to pay taxes on the withdrawal, of course. Having money available when you really need it, without extra costs or penalties, gives you a financial safety net for emergencies.
You can borrow from your RRSP for a first home or education. These withdrawals are generally not taxed. That gives you more flexibility with your retirement savings.
Additionally, you can normally select a wide range of investment options for your RRSP. You’re not limited to only growing your contributions with interest on deposits.
You could choose to invest in mutual funds, stocks, bonds, guaranteed investment certificates, and savings bonds, among other options. This means you can research and review the options, then choose which investment vehicles best align with your retirement goals. There are plenty of opportunities to find the right mix of risk and reward for your needs.
2023 RRSP Contribution Limits
Wondering how to find your RRSP contribution limit? The Canada Revenue Agency (CRA) maintains a table that lists contribution limits for a variety of retirement plans.
For 2023, the dollar amount limit for RRSP contributions is $30,780. In 2024, that maximum figure will jump to $31,560. However, there is also an individual contribution limit based on a percentage of income.
The CRA notes the contribution limit for RRSPs is either the fixed limit or 18% of your income in the prior year. Whichever figure is less is your personal limit for adding funds to your RRSP. However, you can and should include any unused RRSP contribution room from the end of the previous year.
Making excess contributions past your personal limit could expose you to financial penalties. Those additional costs can weaken or even eliminate the tax advantages an RRSP offers. For that reason, it’s especially important to understand your personal contribution limit.
Wondering how to calculate your RRSP contribution limit exactly? The CRA offers in-depth guidance and tables for figuring it out. Start the process with the CRA’s guidance on RRSP limits.
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