With RRSP season in full swing, here's a primer on Canada's registered retirement savings plan.
What is an RRSP?
The registered retirement savings plan was introduced in 1965 to help Canadians save for their retirement. According to Larry Moser, a divisional manager for the Bank of Montreal in Ottawa, it is "the greatest vehicle for retirement savings," and it is one of the few ways to earn an income-tax reduction in your earning years (the amount you contribute is tax deductible). Income tax is paid on RRSP money when it is withdrawn, when you will likely be in a lower-tax bracket.
How do you go about it?
You will need a social insurance number. There is no minimum age requirement to have an RRSP; a minor can set one up with a letter of consent from a parent or legal guardian, who retains signing authority until the child turns 18. You can open one at any financial institution, including online. A financial adviser can also get the ball rolling; it's worth asking friends and family whom they use and whom they've been happy with.
What is this year's deadline?
This year's deadline to contribute for the 2015 tax year is Feb. 29.
What is the maximum contribution limit?
The limit is 18 per cent of your Canadian income, to a maximum of $24,930. If you belong to a company pension plan, this amount will be less.
Can I make up for missed contributions from previous years?
Yes. Many Canadians have a large amount of unused contribution room. This presents a great opportunity when you have extra cash. The government will indicate how much contribution room remains on your Notice of Assessment form from the Canada Revenue Agency.
What kinds of investments can be held in an RRSP?
Stocks, bonds, mutual funds, exchange-traded funds, segregated funds, cash deposits and guaranteed investment certificates are among the broad range of investments allowed.
What about foreign assets?
There are no limits on them, and Canadians ought to be taking advantage of that, says Katrine Clark, a Vancouver-based financial adviser for Edward Jones. But she cautions investors not to go all out. "Not for all your money," she says, "If we're living in Canada and planning on retiring here and spending Canadian dollars we want some Canadian investments as well, but we want to take advantage of these global opportunities."
What is a self-directed RRSP?
This simply means that you are managing the money and assets in the plan yourself, likely through an online platform.
How do spousal RRSPs work?
Spousal RRSPs were designed so that incomes could be split in households where one party earns significantly more than the other, reducing the overall income-tax bill. The higher-earning partner contributes to the spouse's RRSP, and later, when that spouse withdraws income – as long as certain waiting-period rules are met – that cash is attributable to the lower-earning spouse, who is likely in a lower tax bracket.
How do you make early withdrawals, and what are the consequences?
The downside of withdrawing money is that you have to pay immediate income taxes on those funds. Then you might have to pay more at income-tax time. And you will permanently lose the contribution room you originally used to make the contribution.
Withdrawing money for a Hawaiian vacation is probably not worth it, but it might be worthwhile as part of a debt repayment plan, says Ms. Clark.
There are two instances where withdrawals are worthwhile, however: buying a first home or pursuing education. RRSP holders can use the First Time Home Buyers' Plan, which allows for a maximum of $25,000 to be withdrawn tax free, with 15 years to repay it back into the RRSP. Those going to school can take out $10,000 tax free per year over two years as part of the Lifelong Learning Plan, with 10 years to pay it back.
What is the lifespan of an RRSP?
An RRSP lasts until the end of the calendar year in which the account holder turns 71, at which time it must be converted into a registered retirement income fund (RRIF). You must withdraw a minimum payment from your RRIF each year, on which you pay taxes. The minimum amount paid out is based on a calculation using the account holder's birth date and the market value of the plan; it is designed so that even if the plan holder is taking the minimum payment, it will likely last them through the remainder of their lifetime.
Sources: Larry Moser, divisional manager for BMO InvestorLine in Ottawa; Katrine Clark, a Vancouver-based financial adviser for Edward Jones & Co.; and Darren Farwell, senior wealth adviser at Scotia Wealth Management.
Correction: An earlier version of this story incorrectly stated that you must be 18 years old to have an RRSP. In fact, there is no minimum age requirement.