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RRSPs 101: Answers to your questions!

You have undoubtedly heard of RRSP season and seen the word pop up here and there. But how much  do you really know about RRSPs? RRSPs are available at La Capitale and just like home insurance, they can come in handy during various periods in your life. So it’s worth your while to learn more about them!

Find out more about RRSPs using information taken from the La Capitale blog.

What, exactly, is an RRSP?

The registered retirement savings plan (RRSP) is, first and foremost, a tool to help you save over a long period, usually until retirement.

It allows you to grow your money tax free: As long as the money stays in your RRSP, it is not taxed.

Other than retirement, what else is an RRSP useful for?

The RRSP’s main purpose is to secure your financial security at retirement.

However, it can also go toward:

  • Buying your first home through the Home Buyers' Plan (HBP)
  • Going back to school using the Lifelong Learning Plan (LLP)

These plans allow you to make temporary, tax-free withdrawals from your RRSP.

How are your RRSPs taxed?

The money you deposit into an RRSP is then deducted from your yearly taxable income. For example, for your 2020 income taxes, you can include any new contributions made before March 1, 2021. These investments will allow you to pay less taxes in 2020 so that you can put money aside for your retirement, of course!

However, as soon as you withdraw funds from your RRSP, the amount you withdraw is added to your annual yearly taxable income (does not apply to the HBP or LLP for which conditions are different).

At what age can you start investing in RRSPs?

You can contribute to an RRSP after you filed your first income tax return, and you can contribute until December 31 following your 71st birthday.

Note that minors cannot contribute more than $2,000 a year to their RRSP.

What does “contribution room” mean?

Your contribution room is indicated in the notice of assessment you receive with your last income tax returns. It represents the maximum amount you can contribute for the current year.

This amount is usually 18% of your income. This percentage represents the savings rate that would allow most people to use 70% of their employment income at retirement. The calculation is based on retiring after 35 years of work.

Note:

  • If you contribute to another pension plan, your contribution room would be reduced accordingly.
  • The 18% cannot exceed a maximum amount established for everyone: In 2020, the limit is $27,230.

What happens if you exceed your contribution limit or do not contribute the maximum amount?

If you do not make the maximum contribution, the remaining amount is added to the following year.

If you exceed the annual limit, there are two scenarios:

  • If you exceeded the limit by $2,000 or less, the amount will be deducted from your maximum contribution the following year. The good news is there is no penalty.
  • If you exceeded the limit by more than $2,000, you will be penalized. You will have to pay 1% tax on the over contribution amount for each month it remains in your RRSP.

If you want to invest soundly, where should you begin?

RRSPs are interesting investment vehicles, but they’re not for everyone. Before choosing a type of investment, your best bet is to contact a financial security advisor. This specialist will analyze your situation in line with your objectives – buying a property, for example, or planning your retirement income. Then, with your help, the advisor will develop a personalized savings plan.

After the assessment, your advisor and you feel that an RRSP would be ideal in your case? Then here’s an easy tip to help you with your investment: Opt for preauthorized bank payments or better yet, payroll deductions. Happy savings!

When you think RRSPs, think La Capitale.

La Capitale financial security advisors1 are highly experienced and use the cutting-edge tools needed to help you plan a complete savings plan that meets your actual needs. Take advantage of their RRSP expertise!

1. On behalf of La Capitale Financial Services Inc., Financial Services Firm