RRSP Guide 2018
Have you contributed to your Registered Retirement Savings Plan (RRSP) for the 2018 tax year? It is not too late to do so. The RRSP is a program governed by the federal government allowing you to raise funds for retirement exempt from tax while saving on your taxes. In general, any income accumulated in the plan is usually tax-free during the period where the funds remain in the plan. In addition, you can deduct the amount of your RRSP contributions from your annual taxable income. For most individuals, the RRSP is an important source of retirement income. By investing in your retirement savings, you invest in your future. You have until March 1st, 2019, to do so.
Here’s our RRSP guide for 2018.
- What is the maximum amount?
The contribution limits for the tax year 2018 is $26,230 and $26,500 for 2019. However, the amount which you are entitled may not exceed 18% of your earned income (excluding pension and investment income) during the year. For example, if you earned $80,000 in 2018, your maximum contribution amount will be $14,400. Also, if you are a member of a pension plan at work, your limit will also be reduced by your pension adjustment. If you have not paid the maximum amount in your RRSP in recent years, you may have unused contribution room that you will be able to use, which could increase your maximum amount. To find out how much you can invest this year, you can consult your Notice of Assessment that you received from the Canada Revenue Agency (CRA) attached to your 2018 income statement. You can also contact the CRA at 1-800-267-6999.
- A Deduction on Your Tax Return
One advantage of the RRSP is that it allows you to grow your money tax free. Also, it is possible for you to deduct the amount you contribute from your total income, thus reducing your taxable income. The funds invested in an RRSP are taxable on redemption. Therefore, it is recommended to withdraw your money from your RRSP during your retirement while your tax rate is generally low.
- Planning to Buy Your First House
If you plan to purchase your first home, your RRSPs can be a considerable advantage. The Home Buyers Plan (HBP) allows you to use your RRSP for a down payment, without paying taxes upon withdrawal. You can withdraw $25,000 for one person and $50,000 for a couple. To qualify, you must be regarded as the buyer of your first home and become the owner of the main house before October 1st of the year following your withdrawal.
- A Return to School
If you want to return to school, there is a program called incentive arrangements for Lifelong Learning Plan (LLP). Similar to the HBP, it allows you to withdraw funds from your RRSP without taxation in order to finance education expenses for you or your spouse. To qualify for the LLP, you or your spouse must be enrolled full-time in a qualifying educational program. The maximum you can withdraw is $10,000 per year with a total limit of $20,000.
- Reduce Withholding Taxes
In some cases, it is possible to ask the CRA to reduce deductions at source from your employment income during the year to allow you to invest in an RRSP. This way, you can invest these amounts more quickly in your RRSP, otherwise you will only have access to these amounts when the CRA pays your tax refund the following year when you send your notice of contribution.
- Is it better to contribute to an RRSP or to a Free Savings Account tax (TFSA)?
There are several differences between a TFSA and an RRSP. The TFSA does not qualify for any tax savings compared to the RRSPs which reduces your taxable income. However, as mentioned above, the RRSP withdrawal and growth are fully taxable. As the name says, the TFSA is tax-free on both growth and withdrawal. In 2019, the ceiling is $6,000, no matter what your total income is. Your contribution is retroactive and may be deferred until later. For example, if you remove $3,000 from your TFSA in 2019, you cannot put the contribution back in the same year, but you will be able the following year. So, in 2020, you would be able to contribute $9 000 which is the annual $6 000 limit + your withdrawal amount in 2019. Our specialists can help you determine which of the TFSA or RRSP would be the right choice according to your financial situation.
- Reduce Your Annual Salary to Benefit from Socio-Fiscal Programs
If you get a raise, it is possible that you have changed tax brackets, and this may have an impact on the calculation of some social programs and benefits. For example, a $1,000 increase in your annual income could make you lose your tax credit on your child tax benefit. It may therefore be advantageous for you to invest this surplus in your RRSP to reduce your annual income and take advantage of these programs and recover a larger sum.
- RRSP in the Name of Spouse
An RRSP can be an income splitting tool. Indeed, an RRSP in the name of your spouse allows you to split your retirement income. By contributing a portion of your allowable contributions in your spouse’s RRSP you will decrease your income tax and your spouse will be taxed upon withdrawal at retirement. It is worth mentioning that the amounts contributed belong to the spouse, but if there is a withdrawal within 3 years following the contribution, it is you who is going to be taxed on the withdrawal. Only new contributions will be accepted making it impossible to transfer funds from your individual RRSP to a spousal RRSP. This is a very useful strategy for minimizing income tax at retirement. It is very important to note that the amount you pay into your spouse’s RRSP cannot exceed your own contribution limit. It is possible to contribute to your spouse’s RRSP until 71 years old.
- Borrow to Contribute
It is possible for an individual to take a loan in order to invest in an RRSP, known as a leverage strategy. But this option must be carefully evaluated, since the financial profile of each individual is different. It is often recommended to save money to eventually invest in an RRSP instead of borrowing. In addition, interest on the loan is not deductible.
- After 71 Years
What happens to your RRSP after you turn 71? At this time of your life, you will need to convert the amounts invested in your RRSP before December 31st of the year in which you celebrate your 71 birthdays, into a Registered Retirement Income Fund (RRIF). You can also purchase an annuity or take the cash refund. Otherwise, the value of the RRSP property must be included in your income.
Do not hesitate to contact us if you have any questions, our specialists are here to help you.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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