Registered Retirement Savings Plans-Canada

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  • 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.