A Registered Retirement Savings Plan (RRSP) is an account, registered with the Canada Revenue Agency (CRA), which allows you to shelter your investment earnings and defer taxes until you begin to make withdrawals in your retirement years.
You can work with a registered investment advisor to decide what investments you would like in your RRSP and if they suit your financial goals.
Opening an RRSP
There are two different types of RRSP accounts that you can open on your own: individual and spousal. There are also Group RRSPs that some employers provide as a benefit. Talk to your employer if you wish to know more about your company’s plan.
The fees you pay may vary depending on the firm and/or registered investment advisor you choose to manage your account. A registered investment advisor can help you set up your RRSP account. Be sure to:
- Check to see what types of investments you can purchase through the account and your advisor – some advisors are limited to selling mutual funds, for example.
- Ask questions about the different types of charges and fees related to the investments you purchase in your account.
- Shop around to compare fees and other charges at other firms.
To open the account, you will need to provide the firm you are dealing with accurate information about your personal and financial circumstances. The Opening Your Retail Account Guide from the Investment Industry Regulatory Organization of Canada (IIROC) discusses the ins and outs of opening different types of accounts.
Contributing to an RRSP
There is a yearly deadline for contributions to an RRSP account. The contribution deadline for RRSPs is 60 days after the end of the calendar year – usually March 1 or February 29 during a leap year.
There are limits on what you can contribute to your RRSP each year. If you are a member of a pension plan, you will need to factor in your pension adjustment. CRA also sets an annual RRSP limit.
You can also contribute to a spousal RRSP. However, the amount that you contribute will reduce your RRSP deduction limit.
There are tax consequences for taking money out of your RRSP before you retire, and you will lose the contribution room you used when you put the money into the account.
If you borrow from your RRSP to go to school or purchase a home, you can avoid tax consequences if you pay the money back within a specified amount of time.
Closing an RRSP
You must close an RRSP account by the end of the calendar year in which you turn 71. You have until the end of the year to take your savings in cash or convert it into a stream of income. If you choose to turn it into retirement income, you have two options:
- Convert your RRSP into a Registered Retirement Income Fund (RRIF).
- Use your funds to buy an annuity.
If you choose to convert your RRSP into cash when you are 71, you will pay tax on it.
Questions about RRSPs
Your registered investment advisor can answer questions about your RRSP account, or you can visit the CRA website to find out more.
Be Wary of RRSP “Unlocking” Schemes
Unlocking schemes promise that you can immediately access a portion of the cash value of your RRSP without paying taxes. Fraudsters often promote this scheme during tax season – late March and April. All withdrawals from your RRSP will likely have tax consequences.