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Registered Retirement Savings Plan (RRSP)

What is an RRSP?

An RRSP is a plan that allows you to grow your assets tax-free. RRSPs are used primarily to accumulate savings for retirement.

Advantages of an RRSP

  • For tax purposes, you can deduct amounts contributed to your RRSP from earned income, thus reducing your taxable income.
  • As long as you don’t make any withdrawals from your RRSP, you won’t pay any tax on the income your investments earn.
  • You may withdraw RRSP contributions before you retire. However, amounts withdrawn before retirement must be considered as income for tax calculations. What’s more, your financial institution may deduct taxes if you make such withdrawals. Amounts are based on a predetermined scale and may be recalculated at the end of the tax year depending on your taxable income. In addition, your financial institution may charge fees for RRSP withdrawals. 

Home Buyers’ Plan (HBP)

This program lets you make tax-free RRSP withdrawals of up to $25,000 in order to purchase or build your first home. Qualifying homes include single-family homes, semidetached homes, townhouses, mobile homes, and apartments in a duplex, triplex, quadruplex or apartment building. If you and your spouse together buy a house, you may each withdraw up to $25,000 from your RRSPs. However, you must make annual RRSP repayments of 1/15 of the amount withdrawn, until it is repaid in full. (You will not be able to claim a tax deduction on these amounts.)

Various restrictions and exceptions apply. For details, consult the Canada Revenue Agency website.

When can you contribute?

RRSP contributions for a given tax year can be made starting January 1 and continuing until 60 days after the end of the year. However, when the deadline falls on a Saturday or Sunday, contributions can be made until the following business day.

You can make RRSP contributions until December 31 of the year in which you reach age 71, and—under certain conditions—you also can contribute to your spouse's RRSP.

How much can you contribute?

The annual RRSP contribution limit is 18% of income earned in the previous year, up to a fixed annual limit of $25,370 in 2016 and $26,010 in 2017. However, if you belong to an employer pension plan, your maximum contribution amount will be reduced by an equivalent “pension adjustment” set by the Canada Revenue Agency and reported on your T4 slip. Take note that amount you invest in a VRSP (Voluntary Retirement Savings Plan) equally decreases the amount you can contribute in a RRSP.

If you don’t contribute the maximum amount and have not done so in past years, your contribution “credits” have accumulated since 1991. Your federal notice of assessment for the previous year indicates your maximum deductible amount.

If you are over 18, you can exceed your contribution limit by up to $2,000 without incurring penalties. However, this limit is cumulative and not annual. If you exceed the $2,000, a penalty of 1% per month will apply to the excess amount. Anyone under 18 who makes an excess RRSP contribution will be penalized.

Only RRSP amounts that do not exceed your contribution limit can be deducted from your income. An over contribution of $2,000 therefore cannot be deducted from your income but will, however, grow tax-free.

What impact can divorce have on retirement planning?

Divorce can have an impact on your benefits accrued under the Québec Pension Plan, the pension plan offered by your employer and an RRSP. Therefore, a divorce could force you to rethink the way you save for retirement.

Can RRSPs be seized in a bankruptcy?

As a rule, all registered investments – other than contributions made in the 12 months prior to the bankruptcy – are exempt from seizure by creditors. This measure is intended to prevent individuals from planning their bankruptcy by sheltering funds from creditors. For more information, visit the Conseil des Syndics de faillite website.

Tips

  • If your RRSP holds securities (stock, bonds, etc.), make sure you deal with a firm or representative duly registered with the Autorité des marchés financiers (AMF).
  • If you are investing in mutual funds, request a prospectus. It explains the kind of investment you have chosen and discusses risk factors. In the case of mutual funds, the deadline to cancel transactions is two days after receipt of the prospectus.
  • Insist on receiving copies of any documents you sign. You’ll have all the details and conditions that apply to your investments on hand for future reference.
  • If you are offered mutual funds, make sure that they are issued by entities that are registered with the AMF.
  • When transferring funds from one financial institution to another, it’s a good idea to provide instructions in writing. Fees sometimes apply to such transactions, but often the institution receiving the funds will cover the fees. Inquire from your financial institution.
  • To determine the eligibility conditions for an RRSP investment, we suggest that you contact the Canada Revenue Agency.

The Autorité des marchés financiers (AMF) wishes to remind you that an RRSP is one of several tools available to help you save for retirement.