RRSP Questions and Answers
What is an RRSP?
RRSPs are government-approved, tax-deferred savings plans that help people save money for their retirement. Even if you contribute to a company or government pension plan, you can usually reap tax benefits by contributing to an RRSP.
An RRSP allows you to make tax-deductible contributions during high-income years. Then you receive and pay taxes on the proceeds during your lower-income retirement years. As a result, the part of your income that you would usually pay to the government in taxes instead accumulates in a tax shelter as part of your RRSP investment.
How much can I contribute?
You should check the Notice of Assessment from Canada Revenue Agency for the calculation of their maximum contribution available for the upcoming year. Generally, RRSP planholders can contribute 18% of earned income in the preceding year (up to a legislated maximum), less the “pension adjustment” for participants in a Registered Pension Plan or Deferred Profit Sharing Plan, plus any unused contribution room carried forward from previous years.
The maximum RRSP deduction limit for 2011 is $22,450. In subsequent years, the deduction limit will be raised by the Federal Government using an indexing formula.
What happens if I don't use my total RRSP deduction limit?
You can carry forward the unused portion of your annual RRSP deduction limit indefinitely. If you don't have the cash to make your maximum annual contribution, or if your RRSP deduction limit is growing larger with each passing year, you may want to consider an investment loan. This way you can make the full contribution and maximize your potential tax refund.
What if I contribute too much money to my RRSP?
The over-contribution allowance is $2,000. If you exceed this limit, you will incur a penalty of 1 percent per month from the time of your over-contribution.
When should I start contributing to my RRSP?
The sooner you start contributing to an RRSP, the better off you will be at retirement. If you do not have a lump sum to invest at the beginning of the year, we can set you up with regular contributions that match your budget. Contributions can be little as $25 a month.
The earlier in the year you contribute to an RRSP, the more money you will eventually accumulate. For example, if you contribute $2,000 each February for the previous year's contribution, and you earn 5% interest, you will have $130,878 in 30 years. If you contribute the same $2,000 every February for the upcoming year's contribution and you earn the same 5%, you will have $139,522 in 30 years.
What is a spousal RRSP?
You can contribute to an RRSP in your spouse's name and still deduct the contributions from your taxable income. By making contributions to your spouse's RRSP, you are helping your spouse build retirement income.
A spousal RRSP will benefit you in later years if your spouse will be receiving a smaller retirement income than you. Contributing to a spousal RRSP in this way is called income splitting. The money that is growing in your spouse's RRSP will eventually be paid out as retirement income, but will be taxed at a lower rate due to their lower retirement income level.
Any contributions you make to a spousal RRSP are part of your annual RRSP deduction limit. Your contributions to a spousal RRSP do not affect your spouse's annual RRSP deduction limit.
Should I pay down my mortgage or put money into my RRSP?
In most situations it's best to place the extra funds into an RRSP and use your tax refund to pay down your mortgage.