It’s RRSP Time Again!
HOW CAN AN RRSP SAVE YOU INCOME TAX?
A Registered Retirement Savings Plan (RRSP) is a government regulated investment account with special tax benefits to help maximize your retirement savings.
One of the few income tax deferral deductions available to individuals is the Registered Retirement Savings Plan (RRSP). The contributions that you make to your RRSP are deductible from your income, within certain limits, for the year.
The contributions you make to your plan, your spouse’s or common-law partner’s plan, are deductible against earned income for the calculation of income taxes payable. The amount that you can deduct is up 18% of you earned income to a maximum of $25,370 for the 2016 year. The maximum is based on you prior year’s income. If you have not contributed to the maximum in prior years, this shortfall can be carried forward and filled in future years.
The RRSP program started in 1957 to encourage Canadians to save for retirement. Prior to the establishment of the RRSP program, only individuals belonging to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.
Any income earned in the account (including interest, dividends, capital gains etc.) remains untaxed until it is withdrawn by the owner.
In addition to reducing your taxable income, you can also contribute to you spouses RSP. As I mentioned, the RRSP contributions become taxable when they are withdrawn, and by moving this income to your spouse, (often in a lower tax bracket) you can effectively split the income between the two of you. If the withdrawal is made within three years of contribution, the income has to be reported by the contributing spouse.
Numerous types of investments can be held within the RRSP tax free, including interest, dividends, capital gains, GICs, mutual funds, bonds etc. The money held in the fund can be used, without incurring income tax, for programs that can help you buy your first home or pay for further education.
Contributions to you RRSP can be made up until December 31 of the year you turn 71. After 71, if you continue to have earned income, you can contribute to a spousal RRSP up until December 31 of the year your spouse or common-law partner turns 71.
When you turn 71, the government requires that the RRSP be converted to one or more retirement income sources by December 31. An annual minimum payment (AMP) must be taken each year starting in the after the plan is opened. The AMP is considered taxable income. The tax saving aspect results from the fact that you contributed the RRSP contributions during years when you were in a much higher tax bracket and are now withdrawing the funds after retirement at a much lower rate.
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