Answers to the 10 Most Frequently Asked Questions about RRSPs

Every year and particularly as the RRSP contribution deadline draws near, you’re likely to have questions. We believe that every question deserves our attention, which is why we decided to answer the most frequently asked questions about this topic so you can better manage your RRSP based on your particular needs.

What is an RRSP?

First of all, RRSP is the acronym for the Registered Retirement Savings Plan. This program was introduced by the federal government in 1957 to encourage Canadians to set aside money in their retirement funds.

How much can I contribute per year?

Every year, you can contribute a maximum of 18% of your income earned in the previous year to your RRSP. Contributions made to your RRSP throughout the year as well as during the first 60 days of the following year are eligible for the tax year in question. Any unused contributions are cumulative and can be carried forward to future years. To find out your maximum allowable RRSP contribution limit for the current year, consult the notice of assessment that was sent to you by the Canada Revenue Agency (CRA) after filing your income tax return for the previous year.

Why do I have until March 1 to contribute to my RRSP?

There is no deadline for contributing to your RRSP. However, the Government of Canada has extended the contribution period for the previous year to March 1. This gives taxpayers an additional 60 days after the end of the calendar year to assess their income and determine the total amount to deposit in their RRSP for the year in question.

What happens if I withdraw money from my RRSP?

Contributing to your RRSP is an excellent way to reduce your tax bill. The amount invested in an RRSP is deducted from your taxable income. Since your taxable income is reduced, your tax bill is also lower. However, it’s worth noting that you make tax savings by contributing to your RRSP, but you’ll pay taxes when you make withdrawals. When you withdraw amounts from your RRSP, the financial institution that manages it will withhold tax at source. The tax rate will depend on where you live and the amount that you withdraw.

Is there a way to withdraw money from my RRSP without paying tax?

Yes, two main situations allow you to withdraw from your RRSP without paying tax:

• When you make a withdrawal to take advantage of the Home Buyers’ Plan (HBP). This program is offered by the Canada Revenue Agency (CRA) to make it easier to purchase a first home. Under the HBP, you can withdraw up to $60,000 from your RRSP to buy or build an eligible home and your RRSP issuer will not withhold tax on the amounts withdrawn. This gives taxpayers the opportunity to purchase property while maximizing their tax benefits.
• You can also withdraw up to $20,000 of your RRSP to finance your own or your spouse’s or common-law partner’s education, with an annual limit of $10,000 for each individual per calendar year. The Lifelong Learning Plan (LLP) gives you the financial flexibility to invest in your own or your spouse’s education while getting the tax benefits associated with your RRSP.

My employer pays a portion of my RRSP contributions. Do I also have to report these contributions?

Yes. The amount contributed by your employer to your RRSP is in addition to your salary and is considered a taxable benefit. This means that this amount is indicated on your T4 slip and you must include it in your income tax return.

What’s the difference between a TFSA and an RRSP?

The Tax-Free Savings Account (TFSA) and the RRSP are two different financial products that are often compared and confused. In a nutshell, the TFSA was introduced by the federal authorities in 2009 to allow all Canadians aged 18 or older to save without paying tax on the income earned from these savings. In other words, this account allows you to grow your savings without ever having to pay tax on your earnings.
However, unlike your RRSP contributions, your TFSA contributions are not tax-deductible, but your withdrawals are tax-free. Furthermore, there is no age limit for holding a TFSA. Please note that the contribution limit varies from year to year. For example, the TFSA annual limit for 2019 was $6,000. Any unused contribution room is accumulated (carried forward from year to year) so you can catch up when you wish.
In short, a TFSA offers greater flexibility in terms of saving and investing without the tax constraints associated with other account types.

What’s the age limit for contributing to an RRSP?

You have until December 31 of the year in which you turn 71 to contribute to your RRSP. When you turn 71, you must close your RRSP account and decide whether you want to withdraw the funds, use them to purchase an annuity or transfer them to a Registered Retirement Income Fund (RRIF).
At this stage of your life, it is highly recommended that you consult a tax specialist or financial advisor to help you choose the option best suited to your personal and financial situation. They can provide tailored advice on optimizing your retirement income while minimizing the tax implications.

What’s the advantage of contributing to my spouse’s RRSP?

As mentioned earlier, you have until the age of 71 to contribute to your RRSP. However, if your spouse has not yet reached this age limit, you can continue to reduce your tax bill by contributing to their RRSP. Contributing to your spouse’s RRSP can also be advantageous if you expect to receive a higher income than them at retirement. However, you should be aware that any amount that you contribute to your spouse’s RRSP belongs to them.
In a nutshell, contributing to your spouse’s RRSP allows you to maximize the tax benefits and better plan your retirement income.

What should I do if I accidentally exceeded my RRSP contribution limit?

You can overcontribute to your RRSP by $2,000 or less without having to pay a penalty. However, beyond this limit, you must pay a 1% penalty per month while the excess amounts are in your RRSP. This overcontribution is not deductible in the year in which it was made and must be reported in a future return. However, the income generated will be sheltered from tax.
We recommend that you track your contributions to take advantage of the tax benefits offered by an RRSP while avoiding penalties.

To find out more about RRSPs and the tax credits to which you’re entitled, contact us at 1 844 200-IMPO (4676). Our team will be happy to assist you.