- RRSPs are widely used vehicles for saving tax.
- Almost all financial institutions offer RRSPs, so it is worth shopping around for a plan that meets your investment needs of risk, return and cost.
- Contributions you make in a year (and the first 60 days of the following year) are deducted from taxable income, and will almost certainly result in a refund at your marginal rate.
- Investments within an RRSP grow tax free.
- Within limits, you can use funds from an RRSP before you retire to help with a first time home purchase or to fund continuing education.
- Otherwise any withdrawal is taxable.
- An RRSP must be collapsed by the end of the year in which you turn 71.
- When you collapse your RRSP, one of your options is to convert it into a Registered Retirement Income Fund (RRIF).
- You have to withdraw some of a RRIF each year, and this amount is taxable.
- However, your income usually is lower than when you were contributing, so there is a net saving of tax.
- Long-term planning can effectively save even more tax if a couple expect to have different marginal tax rates in the future.
- The higher earning spouse makes a payment into the RRSP of the lower earning one and claims a refund at their higher marginal rate.
- As long as there is a minimum of three years after the last spousal contribution, the lower earning partner can withdraw funds from the RRSP and pay tax at their lower marginal rate.
- The amount you are allowed of contribute to an RRSP is a function of your previous years' earnings and contributions. Your contribution limit is shown on your tax assessment.
- This also means that in your first year in Canada you are not allowed to contribute anything. Your contribution limit is $0. CRA tolerates a set amount of "over-contributions" for which no penalty applies. This amount could vary, so best to check on the CRA website. Currently, this amount is $2000. Other circumstances where the CRA do not penalize over-contributions are where you are required to make contributions as a clause in your employment contract, or where your excess contributions of one year are less than your contribution limit in the following year.
This is one in a series of BE Wiki articles about Taxation.