We all know that saving for the future is important because we need to ensure we have enough money when it’s time to fund our retirement years. Most people are aware that a Registered Retirement Savings Plan (RRSP) is an account, registered with the government, to give it tax-favourable status. RRSPs can hold numerous types of investments: mutual funds, stocks, bonds, Guaranteed Income Certificates (GICs) and more.
There are many types of RRSPs. Some types of RRSPs suit the broad population’s need to simply build up retirement funds; some are tailored to married or common-law couples who also want to lower their tax bill; and others can be offered by employers in a workplace. And if you have more than one, it’s important to manage your contribution limit, and not over contribute, across the account types that are right for you.
The most common type of RRSP is the individual RRSP. Any Canadian over the age of majority in their province of residence, with a valid Social Insurance Number and an income that they reported on their annual tax filings, can open and contribute to an RRSP.
For the 2012 tax year (you have until March 1, 2013, to make contributions for 2012), a person can contribute 18 per cent of their 2012 income, up to a maximum of $22,970, less pension adjustments. If you haven’t contributed up to the maximum allowable amount in previous years, that contribution room is still available to you, because you’ve “carried it forward.”
The amount you contribute to your RRSP is effectively deducted from your income, reducing the income tax you have to pay, which may result in a tax refund. Keep in mind that you will be required to pay tax on the funds once they are withdrawn, typically in your retirement years, when you are most likely in a lower tax bracket.
A spousal RRSP, as the name suggests, is an income-splitting tool available to married or common-law spouses.
“It’s a plan that allows you to contribute to an RRSP on behalf of your spouse or your partner,” says Chris Buttigieg, Senior Manager, Wealth Planning Strategy, at BMO. “It will be registered in your spouse’s name and it will belong to your spouse but the contribution receipt provided by the financial institution will be issued to the contributing spouse.”
That means the contributing spouse – the one with the higher income – theoretically lowers his or her reported income and pays less income tax. It also means that the spouse with the lower income, and therefore less contribution room, gets a chance to build up an RRSP in his or her name.
Spousal RRSPs can offer additional benefits that should be considered when considering savings vehicles.
“There are certain rules around pension income splitting, including that you can only split up to 50 per cent of a pension,” Buttigieg says. “But a spousal RRSP will allow you to go beyond 50 per cent, if the contribution room is there.”
Spousal RRSPs can also be a good choice because they allow a spouse who is over age 71 – the age after which RRSP contributions must cease and withdrawals must start – to contribute to the account of his or her younger spouse.
These types of retirement savings plans are available only to those employees whose workplaces offer them.
Participants in a group RRSP have their contributions deducted from their paycheques and put directly into an RRSP, which is administered by whichever provider or providers the employer selected for the plan.
“There are a couple of advantages to a group RRSP versus an individual RRSP,” says Buttigieg. “One, it’s a form of automatic savings, because the contribution comes right off your pay every pay period.
“The second advantage is that the withdrawal is taken from your pay before the employer withholds any taxes,” he adds.
That means, if someone’s gross pay is $1,500 per pay period and they contribute $200 to their group RRSP, their actual gross is calculated to be $1,300 and their employer will withhold taxes based on the lower amount.
“You get a double benefit when the contribution comes off right at payroll,” Buttigieg says.
A third benefit to group RRSPs is that some employers will actually contribute to their employees’ group RRSPs by matching them or adding an extra 50 or 25 per cent of the contribution, up to a certain limit.
“If you invest a dollar and you get an extra 50 cents from your employer, for example, that’s a 50-per-cent return right from the start,” Buttigieg says. “It’s free money.”
A person can have multiple RRSPs, but total contribution room is based on the individual’s allowable contribution room.
“If you have an RRSP at one institution and another one at another and a group RRSP, you definitely want to be keeping track of how much you’re contributing,” says Buttigieg. “No one wants to pay a fine for over contributing.”