Registered Retirement Savings Plans (RRSPs) are a cornerstone of financial planning for many Canadians, yet they remain confusing for some. This tax-advantaged account offers significant benefits for retirement savings, but navigating the rules and maximizing their potential can be challenging without the right information.
This article aims to clarify common misconceptions and highlight lesser-known facts about RRSPs. I’ve compiled 18 key points that cover everything from contribution limits and tax implications to withdrawal strategies and investment options.
Fact: Contribution Limits
Your RRSP contribution limit is 18% of your previous year’s earned income, up to a maximum amount that changes yearly. For 2024, the maximum is $31,560.
Fact: Carrying Forward Contribution Room
If you don’t use all your contribution room in one year, you can carry it forward indefinitely. This unused room does not expire and can be used until you turn 71.
Fact: Tax Deductions
RRSP contributions reduce your taxable income for the year you make the contribution. The actual tax benefit depends on your marginal tax rate.
Fact: Investment Options
RRSPs can hold various investments, including stocks, bonds, mutual funds, and GICs. They’re quite flexible in terms of what you can invest in.
Fact: Withdrawal Rules
You can withdraw money from your RRSP at any time, but you’ll pay tax on the amount withdrawn. There’s no requirement to wait until retirement.
Fact: Over-Contribution Allowance
You’re allowed to over-contribute to your RRSP by up to $2,000 without penalty. This provides a buffer for calculation errors.
Fact: RRSP Loans
You can borrow money to contribute to your RRSP. The interest on this loan isn’t tax-deductible, but it might still be beneficial in some cases.
Fact: Beneficiary Designation
You can name a beneficiary directly on your RRSP. This can help avoid probate fees on these assets when you pass away.
Fact: Creditor Protection
In many cases, RRSPs are protected from creditors if you declare bankruptcy, but there are exceptions and limitations.
Fact: RRSP Contribution Deadline
You can contribute to your RRSP for the previous tax year up to 60 days into the new year. For the 2024 tax year, the deadline is March 1, 2025.
Fact: RRSP Deduction Carry-Forward
You can make an RRSP contribution but choose to claim the deduction in a future year when your income might be higher.
Fact: RRSP Transfers
You can transfer your RRSP between financial institutions without tax consequences as long as it’s done properly as a direct transfer.
Fact: RRSP Losses
If you have a self-directed RRSP and it declines in value, you can’t claim the capital loss like you can with non-registered investments.
Fiction: Unlimited Contributions
You can contribute as much as you want to your RRSP each year. This isn’t true – there are strict annual limits.
Fiction: No Access Until Retirement
You can’t touch your RRSP money until retirement. This isn’t true – you can access it earlier, but there are tax consequences.
Fiction: Contribution After 71
You can’t contribute to an RRSP after age 71. While you can’t contribute to your own RRSP after 71, you can still contribute to a spousal RRSP if your spouse is younger.
Fiction: You Can’t Touch RRSP Money for Anything But Retirement
Programs like the Home Buyers’ Plan and Lifelong Learning Plan allow you to withdraw from your RRSP for specific purposes without immediate tax consequences.
Fiction: US Citizens and RRSPs
US citizens living in Canada can’t have RRSPs. While there are special considerations, US citizens can indeed contribute to and benefit from RRSPs.
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