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RRSPs 101
What's an RRSP?
- It is a Registered Retirement Savings Plan designed to give you income after you retire. Registration is with the Canada Customs and Revenue Agency. An approved financial institution must supervise it to ensure the rules are followed.
- Assuming you have enough contribution room from earned income, you can make deposits to it until and including the year in which you turn 69 or your spouse or common-law partner turns 69 if you re contributing to a spousal plan.
- Money deposited into an RRSP can be deducted from earned income for tax purposes.
- Investments within a plan can earn money tax-free and as a result, they have the potential to grow at a faster rate than funds saved outside an RRSP.
- Money withdrawn is taxed as income whether it came from capital gains, contributions or interest.
- An RRSP must be closed down by the end of the year you turn 69. You can either take all the money (and ay tax on it) or convert it into a Registered Retirement Income Fund or annuity that will pay regular taxable income.
Tax benefits
RRSPs provide a tax-effective way of saving for retirement.
- Tax deduction - Taxable income is reduced by the amount of your RRSP contribution. This means you can save more than if you hadn't used the RRSP.
- Tax-free income - Your money earns income tax-free as long as it is in the RRSP.
- 3. Reduced tax in the future - When the time comes to start to draw on your RRSP savings, your tax rate will probably be lower than it is during your working years, so you have both shifted the tax burden and reduced it.
- Income splitting - can be used to slit income between spouses. The higher income earner can use his or her own contribution room to put money into the lower-earning spouse's RRSP. On retirement, the lower-income spouse will have to pay less tax.
Useful for other goals
- The Home Buyers' Plan lets you borrow up to $20,000 from your RRSP to buy a home.
- The Lifelong Learning Plan lets you borrow up to $20,000 from your RRSP for full-time education. A maximum of $10,000 can be taken in any one year.
- Periods of low income
- You can withdraw money at any time from your RRSP. Withdrawals are taxable income, and money is withheld for tax when withdrawn, 10 per cent up to $5,000, 20 per cent up to $15,000, and 30 per cent over $15,000.
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