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The Registered Retirement Savings Plan (RRSP) is an investment account designed to help Canadians reach retirement goals. In addition to pension plans and governmental programs, funds from one’s RRSP can be a sufficient source of income during the years after leaving the workforce. Here, we will discuss the benefits of contributing to your RRSP, how withdrawals during retirement work, and also the ways in which someone can benefit from their RRSP before retirement years.
Before we get into the pre-retirement benefits of the RRSP, let’s understand how the savings plan actually works.
When someone contributes to their RRSP, they will benefit from a tax deduction. To explain this, let us use an example. Let’s imagine Tina earns $50,000 annually. Tina recognizes the value of saving for retirement, and throughout the year she contributes $5,000 to her RRSP. As the government wants Canadians to save for their retirement, when Tina files her taxes for the year, her stated income of $50,000 will be lowered to $45,000, as the $5,000 of RRSP contribution lowers your amount of taxable income. This in turn, will lower the total amount of tax you will have to pay for the year. Because of this, it makes sense for individuals earning a substantial income to prioritize contributing to their RRSPs. If you are a student or a part-time worker, it may be smart to hold off on contributing to an RRSP as you may have higher income in future years and can get a greater benefit then.
* The RRSP Contribution Limit is 18% of last years income (to a maximum of $27,830). To check your RRSP Contribution Limit, you can check on your latest notice of assessment or on My Account.
Investment returns in your RRSP grow completely tax-sheltered. It’s important to know that money in your RRSP will not grow automatically, you must select the investments inside your RRSP. Imagine the RRSP and other investment accounts as empty boxes. If you put money inside of an empty box, will it grow? Of course not. The key is that these empty boxes need to be paired with an investment (or multiple investments) that allow the money inside to grow. You can meet with one of our licensed advisors at Skyward if you are curious about learning about the current investments you have, and how to structure your RRSP in the best way possible for you.
When withdrawing from your RRSP, you may have to pay tax on the amounts taken out. Though there is tax to pay, there are many in which to structure these withdrawals to be as tax efficient as possible. You may convert your RRSP into an RRIF (Registered Retirement Income Fund) that allows for smaller withdrawals spanning multiple years, allowing individuals to pay less tax and utilize more of their funds to enjoy retirement. Or individuals may purchase an annuity, which allows for steady amounts of income (similar to the RRIF). Have an advisor that can help you through this process and talk with a tax professional if need be.
Under normal circumstances, this is how the RRSP operates for many Canadians. However, there are two ways in which funds can be utilized from the RRSP for different goals before retirement.
Canadians can use their RRSP for the goal of purchasing or building their first property in Canada. Individuals can withdraw up to $35,000 from their RRSP without any tax consequences. However, it is like taking out a loan from yourself. Though there is no interest charged against this withdrawal, Canadians must pay back withdrawn amounts within 15 years. The Home Buyers’ Plan gives individuals the flexibility in their RRSP to purchase or build property if they do not have sufficient funds elsewhere. Contact an advisor at Skyward Financial if you have further questions about the Home Buyers’ Plan.
The RRSP can also help Canadians with educational costs by utilizing the Lifelong Learning Plan. According to the plan, if individuals are a full-time student enrolled in a qualified program, they may withdraw up to $10,000/year from their RRSP and up to $20,000 in total. Withdrawals are tax-free, but funds should be paid back into the RRSP within 10 years. Qualifying institutions may include universities, colleges, culinary schools, trade schools, and more. If you’re wondering if you qualify to benefit from the Lifelong Learning Plan, contact one of us at Skyward Financial!
Though the RRSP offers many benefits to Canadians, other investment accounts should also be utilized to help someone reach their financial goals. TFSAs, RESPs, RDSPs, and other accounts have different characteristics, and depending on one’s situation they may be prioritized. Everyone, no matter their position in life, should be strategizing for their retirement. It is never too early to start. And with the application of accurate information, you can benefit from your RRSP in multiple ways that many Canadians have not yet learned.