Understanding Registered Retirement Savings Plans

December 17, 2022

Many of us dream about retiring and enjoying the rewards that come from many years of hard work and everyone has a different idea about what their retirement will look like. No matter what your vision is, planning is essential to ensure you have the funds available to make your dreams a reality. For Canadians, the federal government has established the Registered Retirement Savings Plan (RRSP) to help.

What is an RRSP?

An RRSP is a savings plan, registered with the Government of Canada that you, your spouse or common-law partner can contribute to for retirement savings. These contributions are tax deductible to earned income and reduce income taxes owed. Any income earned within the RRSP is exempt from taxes while the funds are in the account. Once RRSP payments begin, monies removed are added to your earnings and income tax is owing.

Registered Retirement Savings Plan vs Spousal Retirement Savings Plan

Within the RRSP, there is a contributor and an owner. The contributor is the person who makes the contribution and deducts the amount from their taxable income. The owner is the person who owns the funds and will utilize them at retirement. In some cases it’s beneficial for the spouse or common-law partner to make contributions on behalf of their partner. This strategy has advantages if one spouse is in a greater marginal tax rate than the other and would receive a greater income tax deduction. This can also be one way to income split for retirement if one spouse is expected to have less pension income and could assist in equalizing pension income between spouses.

How much can be contributed?

The annual maximum each Canadian can contribute is 18% of their previous year’s income minus any pension adjustments, up to the annual limit. The limit for 2022 is $29,210. Contribution limits can be carried forward every year if not fully utilized. It’s important to check through your Notice of Assessment or your My Service Canada Account for your personalized totals.

What happens with over-contributions?

There is an over-contribution ‘safety net’ of $2000 if a miscalculation is made. Although you cannot use this amount as a tax deduction, there is no penalty charged. Once this amount is exceeded the penalty is 1% per month on the excess contribution.

How are contributions invested?

Monies can be placed in various types of investments including stocks, bonds, mutual funds, exchange-traded funds and Guaranteed Investment Certificates. You can create a customized portfolio based on your time horizon for investing, objectives and risk tolerance. Making these decisions and reviewing your progress regularly can help you reach your goals.

Home Buyers Plan (HBP)

The HBP allows first-time home buyers to borrow up to $35,000 from their RRSP to put toward the down payment on a home or to fund building a home. This withdrawal is not added to your taxable income if repaid to the RRSP within 15 years.

Lifelong Learning Plan (LLP)

The LLP allows individuals to borrow from their RRSP to finance full-time training or education for themselves or their spouse or common-law partner. Withdrawals are up to $10,000 in a calendar year to a maximum of $20,000 each time a student participates in the LLP. The student must be enrolled in a qualifying education institution for at least three months during the year. These withdrawals are not added to your taxable income if repaid to the RRSP within 10 years and must commence at a maximum of five years after the first year of withdrawal.

When to begin withdrawals from RRSPs

RRSPs can be converted to an income stream known as a Registered Retirement Income Fund (RRIF) as soon as a person retires or they can wait until the maximum age of 71. There is a minimum withdrawal percentage based on your age and any withdrawals are considered taxable income for the year.

Make the most of your RRSP

1. Start early, invest wisely and watch it grow over time, tax free.

2. Maximize your contributions within your budget. Making regular contributions will add up and help to reach your ultimate retirement goals.

3. Understand how RRSPs work in relation to income tax savings, investment building and when the best time is to commence withdrawals.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.