Five Important Things to Consider When Starting an RRSP

Registered Retirement Savings Plans (RRSP), as the name suggests, are retirement savings plans to which self-employed and employees can contribute.

RRSP has broadly two main advantages- First, contributions will be exempt from taxes. For example, if you invest $100 in tax savings and the tax rate is 40%, you are saving $40 in taxes. Second, the investment income is tax-deferred, which means the returns from RRSP will be exempt from dividend tax, capital gains tax, etc. The government of Canada started this to make people less dependent on the Canadian Pension Scheme. If you are considering investing in an RRSP, the following points can help get you started.

1. How much money can you contribute

You can save money on taxes by contributing to RRSP, as the invested amount is tax deductible. However, you need to note that the government has put a limit on the invested amount to prevent too many dollars out of the tax base. The maximum annual deposit of 18% of earnings has been in place for a long time. To know about the RRSP contribution limit, check out the Canada Revenue Agency website (CRA) or contact CRA directly. You can also look at your notice of assessment (which you will get when the revenue department confirms your tax returns). You may learn more about RRSPs in-depth by speaking with a CPA in Kelowna Vernon.

2. Tax Refund

Every RRSP contribution can reduce your payable taxes at the end of the year. And you may be entitled to reimbursement when filing your taxes if your employer made deductions for RRSP when they paid you. So, the amount you invest in RRSP can help you save taxes, as we have mentioned before.

3. Money withdrawn from RRSP is subject to withholding

You must pay taxes to the government for the money you take out of your RRSP. This is called withholding taxes, and the percentage of payable tax depends upon the amount you withdraw from the account, such as-

• 10% on an amount up to $5000
• 20% over $5000, and so on

Also, the amount withdrawn from the RRSP can’t be replaced. But two federal programs can help you take out money without paying withholding taxes and give you a chance to pay it back.

Home buyer’s Plan

Someone buying a home for the first time can finance their purchase from RRSP. You can withdraw up to $35,000, and if you have a spouse, he/she can also withdraw $35,000, which means $70,000. However, you must return the funds to the RRSP within 15 years, or you will have to pay taxes on the remaining amount.

Lifelong learning plan

You can withdraw an amount of $10,000 from a registered retirement saving plan for specific education and training programmes. Also, if your spouse is enrolled in an appropriate training program, you and your spouse can withdraw up to $20,000. However, you should pay the amount within ten years, or you’ll have to pay income tax on the remaining balance.

4. Think about setting automatic transfers

Just like a CA eases tax filing, setting up an automatic transfer can make RRSP contributions easier. Some financial institutions allow you to automatically transfer a certain amount of money to your RRSP account directly on a monthly or weekly basis. All of this will enable you to save money at the end of the year and take advantage of compound interest.

5. Check out the different types of RRSP investments

In terms of risk and return, not all RRSP investment options are created equal. One of the most popular investment options among Canadians that can be held in an RRSP is mutual funds. Other investment options are guaranteed investment certificates(GICs), bonds, exchange-traded funds, stocks, mortgage loans, etc.

The bottom line

One of the most essential steps in saving for your future is starting an RRSP, but it’s crucial to consider the above factors before making the investment decision. By taking the time to understand the limit of contributions, tax refunds, withholding taxes, and automatic transfers and knowing different RRSP investments, you can ensure your RRSP will help you meet your financial goals.