Do you know how RRSP works and its main benefits ?

After the winter break, one important thing to think about is your RRSP account and contribution. We will provide more information about this specific account and the importance of having one later in this article. The main reason to turn your mind to RRSPs is that March 1, 2023, is the deadline to contribute to your RRSP account in order to receive tax benefits for the 2022 calendar year. 

What is an RRSP? 

Registered Retirement Savings Plans (RRSP) was first created in 1957 as a retirement incentive plan for employees and self-employed people in order to help save income tax as well as will build money for retirement. RRSP contributions will lower your taxable income. Higher-income earners will benefit from a higher income tax deduction.

What are the main advantages of having an RRSP? What can I do with it?

The savings from your RRSP account can be used as a down payment to buy a house, for your retirement plan, to support you and your spouse's education, for emergency funds or to increase or build up your net worth. We will explain the advantages in further detail later in this article.

Who can contribute to RRSP?

Any resident with a valid Social Insurance Number with accumulated contribution room over the years can open an account and start taking advantage of it.

How do I accumulate RRSP contribution room?

The RRSP contribution room is accumulated using 18% of earned annual income, which is the sum of all net income that you may have; such as net income from employment, net income from a business (including a partnership), net rental income from real estate, Canada Pension Plan, disability pensions, and spousal support payments.

When should I start to contribute?

The secret to planning a successful RRSP is to start taking advantage when you are young; the earlier you start to contribute to your RRSP, the longer your money will have to grow tax-free.

Start as early as possible to take advantage of "the magic of compounding", as the longer your money earns interest, the bigger the money will grow.

How much can I contribute each year?

Each year, the Canadian government sets the maximum amount, and for the 2022 calendar year, the amount is $29,210; however, if you have unused contribution room from past years, that amount will become the maximum amount that you may be able to contribute. This information is available on your 2021 notice of assessment and is also available through your CRA account. 

Can I use it to buy a house?

You may borrow funds from your RRSP to buy a qualifying home through the Home Buyer's Plan or pay for qualifying educational programs through the Lifelong Learning Plan. You must repay the borrowed funds to your RRSP according to a schedule; otherwise, you will pay income tax on the funds not paid back. 

My spouse is not working. Would my spouse be able to contribute to an RRSP?

Yes, this is called a Spousal RRSP contribution. The spouse with the higher income can make a spousal RRSP contribution in their spouse’s name and take advantage of the contribution for tax purposes, decreasing the amount of income tax payable. 

The annuitant (the spouse receiving the contribution) will then be able to use the funds in the Spousal RRSP to participate in the Home Buyers Program as well and use the Spousal RRSP for retirement or emergency needs.

The spousal RRSP is a good strategy for income splitting where the spouse with the lower earnings can later withdraw funds from the Spousal RRSP and pay taxes at a lower tax bracket. However, keep in mind that, except for Home Buyers Plan, withdrawals from a Spousal RRSP can have the income tax payable upon withdrawal attributed back to the contributing spouse if the withdrawal takes place in the year of the contribution or the two preceding years.

Should I make one contribution per year or more than one?

Contributions to an RRSP can be made all year round in the form of a PAC (Pre-Authorized Contribution). The main advantage is this is a way of accumulating wealth without the need to dispose of a larger part of your income at one time for last-minute contributions. 

Until when can I contribute?

Contributions to your RRSP account can be made until the year that you turn 71 years old. After that, the account will have to be converted from an RRSP to an RRIF, and you will have to start to withdraw money based on a prescribed rate each year.

RRSPs can be used to fund your retirement needs, and most likely, at retirement, the RRSP withdrawals will be taxed at a lower tax rate because your income will generally be lower than when you were working.

                We hope that this article helped solve some questions that you may have about this type of account and that it will help you decide about your future before the end of the contribution period on March 1, 2023, and potentially receive a refund for 2022. If you have any questions, please contact us at Moulatlet Financial, and we will be happy to help you. Give us a call (604) 560-8441 or e-mail us at paulo.moulatlet@manulifesecurities.ca.