We feel it is important to periodically review the basic tax-advantaged account structures available to Canadian investors. In this article, we’ll discuss the Registered Retirement Savings Plan (RRSP) and it’s sibling, the Spousal Retirement Savings Plan (SRSP).

Who Will Make Best Use of an RRSP?

You will benefit from an RRSP if you are working and your income is greater than your anticipated retirement income will be, you want to save money for retirement, you want your savings to grow in a tax-sheltered manner, and you will not need this money until retirement.

How Does an RRSP Work?

• RRSP contributions made from March 2nd of the current calendar year through March 1st of the following calendar year will count toward your tax return for the current calendar year. For your 2018 Tax Return, your contributions made from March 2, 2018 through March 1, 2019 can be deducted.

• Generating RRSP Space: individuals who live in Canada and derive earned income will generate RRSP space. The calculation is 18% of earned income to a maximum of $26,500 for 2019. The annual earned income required to maximize the annual RRSP generation is about $147,250.

• Generating Tax Saving: you receive a tax saving on RRSP contributions equivalent to your marginal tax rate. Let’s use the example of Suzie, an executive at Wonderful Foods Inc. Suzie makes $100,000 per year. Based on this income, her 2018 combined BC + Federal marginal tax rate is 38.29%.
  Suzie receives a bonus in cash and decides to contribute $5,000 of it to her RRSP. She will therefore generate a tax saving of $5,000 x 38.29% = $1,914.50. If we assume Suzie’s employer withholds tax such that she has a tax refund/balance due of exactly $0, then this $5,000 contribution will give Suzie a refund of $1,914.50. It is important to remember that “tax saving” isn’t necessarily the equivalent of “tax refund”.

• Carry Over Unused RRSP Contributions: You can carry over your RRSP contributions if you want. This is helpful if you want to contribute now, but you know that in the next few years, your marginal tax rate will be higher.

• Tax-Sheltered Growth While Invested: Anyone who has invested in a non-registered account must declare any capital gains, dividends or distributions, and interest earned on their investments. Not so in the RRSP. While money is invested within the RRSP, growth of any sort is sheltered from taxation.

• Equalize Retirement Basket (with a Spousal RSP): Consider the case of Suzie and her husband, Ralph. Suzie earns $100,000 per year but Ralph stays at home taking care of the children. Thus, if Suzie contributes only to her RRSP, then there will be a sizeable retirement income disparity. This disparity can be dealt with ahead of time by utilizing the Spousal RSP. In this example, the SRSP is in Ralph’s name (so at retirement, Ralph claims the income) but contributions use Suzie’s RRSP space. This makes sense because Suzie is in a high marginal tax bracket compared to Ralph, so there is a sizable tax savings in the present, and income sharing lowers the overall tax paid in retirement.

• Defer Tax until Retirement: In theory, your working-age income (and resulting tax rate) will be higher at retirement. Ramin makes $175,000 per year, so his marginal tax rate is 45.80%. He contributes $20,000 per year to his RRSP and realizes a tax saving of (45.80% x $20,000) $9,160. In retirement, Ramin converts his RRSP to a Retirement Income Fund (RRIF) and withdraws $10,000 from the RRIF. His total income at retirement is $75,000 per year. At $75,000 per year, Ramin’s RRIF withdrawals are taxed at 28.20%. By deferring his income via RRSP, Ramin has effectively saved 17.60% in tax upon redeeming, or $176 per $1,000 redeemed in this example.

Frequently Asked Questions

Question: How do I find my RRSP Deduction Limit?
Answer: You can find your new RRSP limit on your Notice of Assessment.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: I have a workplace/group RRSP, how is this treated at tax time?
Answer: An important benefit of a workplace RRSP is that you receive the tax saving at the time of the contribution. Your employer will take gross income and contribute it to your work/group RRSP. In addition, most (but not all) work/group RRSPs will contain an employer matching component. For this reason, it is almost always advisable to maximize any workplace RRSP prior to contributing to an external RRSP.

Question: What if my working income is the same as, or lower-than, my RRSP income?
Answer: If this is the case, and you don’t foresee a situation where your working income will ever exceed your retirement income, you may not derive a meaningful tax saving in the present, but redemptions at retirement still count as income. The TFSA may end up being best for you. We can assist you in determining what makes the most sense given your specifics.
However, if you feel that over time, your working income will increase and there will be a subsequent tax advantage versus your projected retirement income, you can always contribute to your RRSP and carry over your contributions until your income and marginal tax rate have increased.

Question: I’d like to save up to buy a house, so I need my savings prior to retirement. I suppose I should just contribute to my TFSA then, right?
Answer: Not necessarily. There is a provision called the Home Buyers Plan (HBP), which allows you to withdraw up to $25,000 for use toward the down payment on your first home. Think of this as an interest-free loan to yourself. Of course, the loan must be repaid to your RRSP over time. You have a 2-year grace period, at which point you must repay a minimum of 1/15^th of the balance withdrawn per year, over 15 years.
Consider Suzie from our previous example. Suzie withdrew $15,000 via HBP to fund a portion of her down payment. After her 2-year grace period, Suzie will have to repay her RRSP $1,000 per year for the next 15 years.

Question: Is there a provision for people returning to school?
Answer: There is! The provision is called the Lifelong Learning Plan (LLP). You can redeem up to $10,000 in a calendar year, and up to $20,000 in aggregate, to help fund your continued education. Repaying the LLP is similar to the HBP, but you have to repay 1/10^th per year over 10 years.

Question: I have over-contributed above my RRSP limit. What are the consequences and what do I do?
Answer: Every person has a cumulative “buffer” amount of RRSP space. This amount is $2,000. So, over-contributions less than $2,000 don’t require any action. If you have contributed in excess of this $2,000 buffer amount, you will have to pay a penalty of 1% per month on any excess above the $2,000 buffer. This 1% per month will add up fast, so if you even think you may have over-contributed, you’re better off investigating right away.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.