If you're reading this, there's a good chance you – like millions of other Canadians – have a registered retirement savings plan.
But how much do you really know about RRSPs?
With the March 3 contribution deadline fast approaching, I've put together a list of five fun RRSP facts designed to take your knowledge to the next level. For handy reference, I've structured the information in an easily digestible Q & A format.
Study these questions on your own. Share them with friends and family members. Write them on cards and pass them around at your next dinner party – it's more fun than Twister!
Do I have to claim my RRSP deduction in the same year as my contribution?
No. You can carry forward all or part of an RRSP contribution and claim the deduction in a future year if it is more advantageous. For example, if you made an RRSP contribution during a year when you weren't working, you would be wasting the deduction by claiming it when you had little or no income. You would be better off claiming the deduction after you were back at work and your income was higher. Similarly, if you expect to be in higher tax bracket in a future year – say you're expecting a large capital gain – it might make sense to use your RRSP deduction that year to maximize your tax savings.
Is it possible to get money out of an RRSP tax-free?
Yes. Under the federal Home Buyers' Plan, first-time buyers can withdraw up to $25,000 to purchase or build a principal residence. The catch is you have to repay the money to your RRSP over a period of no more than 15 years. Similarly, the Lifelong Learning Plan permits RRSP withdrawals up to $20,000 – with an annual $10,000 limit – to pay for full-time education or training for yourself or a spouse. Generally, the money must be paid back over 10 years. If you repay less than the minimum amount in a particular year, the difference is added to your income and taxed accordingly.
Can I make a straight RRSP withdrawal before I retire?
Yes, but the financial institution will hold back a portion of the withdrawal as tax and forward it to the government. The tax withheld is 10 per cent for withdrawals up to $5,000, 20 per cent for withdrawals of between $5,000 and $15,000, and 30 per cent for withdrawals over $15,000. (Note: The rate is not graduated; it applies to the entire withdrawal. Withholding rates are lower in Quebec). The amount withdrawn is added to your income for the year.
When I get a tax refund, am I actually any richer?
No. Say you have $1,000 in cash and your marginal tax rate is 40 per cent. If you contribute that $1,000 to an RRSP, you'll get a $400 refund. So, like magic, you have $1,400, right? Wrong. You have $400 in after-tax dollars plus $1,000 pre-tax inside the RRSP. If you assume a constant tax rate of 40 per cent, the $1,000 inside the RRSP will be worth only $600 if you withdraw it. Combine $600 with the $400 and you'll have $1,000 – the same as when you started. So the tax refund, in and of itself, has no value.
So what is the point of RRSPs then?
RRSPs have two main benefits. First, there is no tax on interest, dividends or capital gains inside an RRSP. (For more on this, read my column tgam.ca/DvYr.) Second, RRSPs are even more advantageous if your marginal tax rate at the time of withdrawals is lower than your tax rate when you made contributions. This will be the case for many people who draw on their RRSPs in retirement when their income is lower.
John Heinzl