3 Tips to Make the Most of the Registered Retirement Savings Plan
Registered Retirement Savings Plans (RRSPs) were introduced in 1957 to encourage employees and self-employed taxpayers to save for their retirement. RRSP contributions are deductible from the total income, as long as they are within the RRSP limit. Here are three tips to help understand RRSPs:
1. Consider Contributing to Your RRSP
By contributing to RRSP, the net income lowers, so there are less taxes to be paid and the taxpayer might qualify for benefits that the government is providing. Take Sophia and Mark, for example. They are married, live in Ontario and have two children, ages two and four. They have about the same income each, totaling $110,000. If each of them is contributing as low as $2,500 per year, this gives them $1,632.50 more refund and $285 more Canada Child Benefit. Or, take Jane, for example. She is a single mom of a one-year-old child, living in British Columbia and earning $45,000 a year. If she just saves $1,500 in RRSP, this gives her $340.50 more refund, $105 additional Canada Child Benefit and $105 additional GST credit.
2. Consider Where the RRSP is Invested
Because the income accumulated into the RRSP is not taxable at the time the income is earned, it makes sense to invest the RRSP into a vehicle where the income is taxed 100%, such as interest, and invest the funds outside an RRSP into a vehicle where the income is taxed at a lower rate, such as capital gains. For example, if a taxpayer is earning $2,000 of interest income into an RRSP account, he doesn’t need to pay taxes on it at the moment he earns this interest. If he also has $2,000 of capital gains earned outside the RRSP, he will have to pay $371.60 in taxes, assuming he is in a 37.16% tax bracket. If he would have the interest income earned outside the RRSP and the capital gains inside the RRSP, then he would have to pay $743.20 in taxes.
3. Pay Attention to the RRSP Limit
Taxpayers can contribute to their RRSP, up to their RRSP contribution room, plus an excess contribution of maximum $2,000. The RRSP contribution room is calculated based on the earned income. An important thing to remember is that withdrawals from RRSPs do not affect the contribution room (the contribution room is not regained), as it happens with the Tax-Free Savings Account. Exceeding contributions to RRSP may be subject to a 1% per month penalty.