For many Canadians, saving for retirement can be an overwhelming and complicated journey. Starting is often the hardest part. Registered Retirement Savings Plans (RRSPs) are accounts registered with the Canada Revenue Agency (CRA), that help you save for retirement. To make it easier, we created a simple guide to understanding RRSPs. In this post you’ll learn about:
- Advantages and disadvantages of RRSPs
- What you should know when opening an account
- How to open your account
- Different types of RRSPs
- How to access your savings when you retire
Advantages and Restrictions of Using RRSPs
Like any savings account, RRSPs maintain advantages and limitation. Advantages include:
- Income tax deductions from your annual contributions
- Deferrable tax liability
- Tax free interest on investments within your account
- The ability to borrow from your RRSP early to purchase a home or pay for education, and avoid taxes by paying dues within a specified amount of time
- Tax free transfers between RRSPs
- The ability to hold multiple accounts
Restrictions and limitations associated with RRSPs:
- An annual contribution limit of $27,230 for 2020
- Taxes on withdrawals made before retirement
- Mandatory closing of your RRSP account(s) by the end of the year you turn 71
Types of RRSPs
There are three types of RRSP accounts that you may open.
- Individual: This account is registered in your name. Any investments held and tax advantages belong to you.
- Spousal: This RRSP allows you and your spouse to split savings more evenly in retirement. To qualify, you must:
- Have lived together for at least 12 months
- Have a child together by birth or adoption; or
- Share custody and support of your partner’s children
- Group: Your employer may offer group RRSPs as a benefit. These are individual accounts that permit contributions to be made through your employer.
Three Things You Should Know Before Opening an RRSP
Before opening an RRSP account be sure to research, gain an understanding of, and consider the following factors.
- The types of investments purchasable through your account. RRSPs can hold a variety of investments including:
- Guaranteed Investment Certificates (GICs)
- Mutual Funds
- Exchange Traded Funds (ETFs)
- Income Trusts
- The costs associated with your account. Fees vary depending on your firm or advisor. Securities regulations require your firm or advisor to provide you with an annual Charges and Compensation Report detailing the cost of the fees you pay and services you receive.
- The accounts that are offered by different firms and institutions. Depending where you decided to open your account(s), you could encounter:
- Different portfolio services
- Varied rates of return
- Cashable vs Non-cashable options
- Different costs
- Different tax rates
Opening an RRSP Account
RRSP accounts can be opened through banks, trust companies, credit unions, mutual fund companies, investment firms, and life insurance agencies. To open the account, you must:
- Provide your financial advisor with personal and financial information which proves that you have earned income
- File your income tax return to develop contribution room. (Contribution room is the maximum amount that you can contribute to your account as set forth by the CRA; your Notice of Assessment outlines your annual contribution limit).
- Decide on investments that suit your savings and portfolio objectives
The contribution deadline is 60 days after the end of each calendar year. You can carry contribution room indefinitely if you are unable to contribute to your RRSP. Unused room will be taken into account on your deduction limit.
How to Access Your Savings When You Retire
When you retire and close your RRSP, you have the option to withdraw your savings or convert them into an income stream. There are two retirement income options:
Make Informed Decisions about RRSPs
If you have any complex RRSP-related questions, be sure to consult your registered advisor. Your advisor will be able to answer your questions and help you invest in-line with your retirement savings goals. Here are some great resources to help you learn more about RRSPs:
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.