Wednesday, November 8, 2017
Registered Retirement Savings Plans: What you need to know
As Baby Boomers enter retirement their preferred method of savings remains the Registered Retirement Savings Plan or more commonly known as the RRSP. Almost half of Canadians contribute the RRSP, with the amount hovering around 46%. The average contribution to these plans by Canadians is about $5,000. The reasons vary for the contributions with 40% wanting to have enough for retirement, 39% want to receive a tax refund and 35% wish to achieve an ideal retirement lifestyle. Those who don’t contribute to their retirement have various reasons as well. 42% say they don’t have the money and 28% say that other expenses take priority over RRSP contributions. The fact remains that the RRSP is the most popular method of saving for retirement by Canadians. Unfortunately, many people I meet with RRSP’s don’t know fully how they work. Truly understanding them is important to get the most use out of them. In this post, I will go over the RRSP and will show you the basics and benefits. In my opinion, the RRSP is an amazing investment vehicle, but only if you use it properly.
How much you can contribute
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:
- 18% of your earned income in the previous year, or
- the maximum contribution amount for the current tax year: $25,370 for 2016.
If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future.
Investments you can hold in an RRSP
Investments that can be held in an RRSP are called qualified investments. They include:
- Gold and silver bars
- Savings bonds
- Treasury bills (T-bills)
- Bonds (including government bonds, corporate bonds, and strip bonds)
- Mutual funds(only RRSP-eligible ones)
- Equities (both Canadian and foreign stocks)
- Canadian mortgages
- Mortgage-backed securities, and
- Income Trusts
Investments you can’t hold in an RRSP
- Precious metals
- Personal property such as art, antiques, and gems
- Commodity futures contracts
As of March 22, 2011, you also can’t hold any of the following investments in your RRSP:
- Prohibited investments – Examples: debt you hold, investments in entities in which you hold an interest of 10% or more.
- Non-qualified investments – Examples: shares in private holding companies, foreign private companies, and real estate.
If you buy these investments for your RRSP, you will be charged a tax equal to 50% of their fair market value. You may apply for a refund if you dispose of the investment from your RRSP by the end of the year after the year the tax applied. The value of your RRSP may go down as well as up, depending on the investments it holds.
How long your RRSP can stay open
The Benefits of the RRSP
3 tax advantages
Tax-deductible contributions – You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
Tax-sheltered earnings – The money you make on your RRSP investments is not taxed as long as it stays in the plan.
Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability till the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.
For the Baby Boomer, the RRSP remains the king of investment vehicles. It provides the instant gratification from the tax deduction and larger return, as well as the long-term satisfaction of getting taxed at a later date. To me, it’s the investment growth that gets me going and the retirement planning aspect of it. I think that everyone should have an RRSP for the specific reason that it has all those great features. Tax efficiency is key, as saving money is just as good as making it. Baby Boomers have flocked to the RRSP for this reason. With the introduction of the Tax-Free Savings Account (TFSA), Canadians have even more ways to save for the future. Now if only we all took advantage of these great methods of saving for the future.
Thanks for tuning in today during Baby Boomer Week at Budget Boss. If you wish to set up an RRSP or have questions about your own, please send me a message at firstname.lastname@example.org. Have a great day friends!
“After two decades of personal finance reporting, I’ve heard every excuse in the book for not saving money. That said, none of them really hold up – at least over the long term.” – Jean Chatzky
Email – email@example.com