A Registered Retirement Savings Plan (RRSP) is an account available to Canadian taxpayers who are 18 years of age or older, in which they can deposit pre-tax income, which isn’t taxed until the money is withdrawn. The money in this account can be invested freely, but there is an annual contribution limit.
The RRSP annual contribution limits are based on several factors. Account-holders can contribute 18% of their previous year’s earned income, up to a maximum limit. In 2019, the maximum contribution limit is $26,500. Previous annual contribution limits are as follows:
These contributions are cumulative, so account-holders who have not deposited the full amount they were eligible to contribute in previous years will have the remaining amount carried into future years indefinitely, raising the maximum contribution limit. Additionally, account-holders can make contributions to both their own RRSP and their spouse or common-law partner’s RRSP, although this doesn’t allow double the contribution; the annual limit remains the same even if the contributions are spread between two accounts.
Contributions that are deductible in the current year must be put into the RRSP no later than 60 days after the end of the taxation year. For more information on RRSP contributions, see CRA Guide T4040.
The primary benefit of the RRSP is the ability for account-holders to deduct contributions from their income tax. The RRSP also allows for a broad range of investments within the account, including stocks, bonds, GICs, and mutual funds. As for using the accumulated money in the account, the Home Buyer’s Plan allows account-holders to withdraw up to $25,000 from their RRSP tax-free to put towards the down payment of their first home, although it must be paid back to the RRSP over the following 15 years.
The Lifelong Learning Plan is another option, which allows account-holders to withdraw up to $20,000 total to pay for the education of themselves or their spouse/common-law partner. This money must also be paid back to the account, within 10 years.
An RRSP matures when the account-holder reaches the age of 71. At this point all funds in the account must be moved. This money can be withdrawn, transferred to a Registered Retirement Income Fund, or used to purchase an annuity.
Withdrawing the entire sum of money in a single year is not recommended, as this often puts the account holder in a higher income bracket for that year. Individuals who have RRSP deduction room available after age 71 will be able to contribute to a spousal RRSP until the end of the year in which their spouse or common-law partner turns 71.
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