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An RSP, or Registered Retirement Savings Plan, is an individual savings plan that allows you to make tax-deductible contributions over a number of years. Contributions are invested and earn tax-sheltered income, providing you with the opportunity for enhanced growth of your savings to live on when you retire.
You can find your personal contribution limit on your Notice of Assessment from Canada Revenue Agency (CRA), which you receive each year after you file your income tax return. Generally, you can contribute up to 18% of your previous year's "earned income", or the maximum limit amount of $21,000 for 2009, less pension adjustments. More information
If you don't make your maximum allowable contribution this year, it will be automatically deferred until a future year. For example, if you are eligible to make a $14,500 contribution this year, but are only able to contribute $10,500, you can carry forward the $4,000 amount to a future year without affecting your regular contribution limit.
To see what your total allowable carry-forward contribution is for this year, check the Notice of Assessment that Canada Revenue Agency (CRA) sent to you after you filed your taxes last year.
You are allowed to exceed your RSP contribution limit by a lifetime maximum of $2,000. Canada Revenue Agency (CRA) offers this $2,000 over-contribution cushion to help taxpayers who accidentally over-contribute. There is a 1% per month tax penalty for contributions that exceed the combined total of your maximum RSP contribution limit and the lifetime over-contribution limit.
Many employee pension plans don't provide enough income when you retire. Often they are not even indexed for inflation. Your RSP can be used to supplement your income.
If you are a member of a Registered Pension Plan (RPP) you must deduct your previous year's Pension Adjustment (PA) from your maximum RSP contribution amount to figure out how much you can contribute to your RSP for the year.
The Pension Adjustment helps to equalize the pension system, since some pension arrangements are more lucrative than others. If you have a generous pension plan, your Pension Adjustment will be higher than if you have a less generous plan.
Your employer calculates your Pension Adjustment and the amount can be found in Box 52 on your annual T4 statement or Box 34 on your T4A. You can also check your Notice of Assessment for the amount of contribution room left after the Pension Adjustment.
If you receive a severance package or other form of retiring allowance upon retirement or termination of your employment, you can transfer the eligible part of that allowance into your RSP within 60 days of December 31st.
You can transfer $2,000 for each year or part year of service before 1996 in which you were employed. You can also transfer an extra $1,500 for each year or part year of service before 1989, as long as you were not entitled to receive any benefits you earned under a pension plan or DPSP from contributions your employer made for each such year.
These transfers do not reduce your RSP contribution room.
Ideally, you and your spouse should each have an RSP, so that there are two RSPs set up to provide retirement income. This can reduce taxes at retirement because you'll likely pay less tax by withdrawing the same amount of income from two smaller incomes than from one large one.
With a spousal RSP, you can defer taxes now and reduce them at retirement.
A spousal RSP works best if it's likely that you and your spouse or common-law partner will be in different tax brackets in retirement. The person making the RSP contribution benefits from the current tax deduction. Because the spousal or common-law partner RSP income will likely be taxed at a lower rate, your combined tax bill may be significantly lower than the taxes paid on a single RSP. You can contribute all or a portion of your maximum allowable RSP contribution to a spousal RSP.
Note: If money is withdrawn from a spousal RSP or RIF in the same year a contribution was made or within the two following calendar years, the income received will be attributed back to the contributing spouse, not the owner/ annuitant of the RSP or RIF. This rule is known as the "three-year attribution rule". However, this rule will not apply if the owner/annuitant of a spousal RSP converts to a RIF and only the annual prescribed minimum amount is withdrawn.
You may continue to contribute to your RSP up to and including the end of the year in which you turn 71 years of age providing you have earned income.
If you are over 71, have earned income and your spouse is still young enough to have an RSP, you may contribute to a spousal RSP and take the tax deduction for your contribution, even though you may no longer contribute to an RSP for yourself.
While reducing your mortgage quickly makes sense, you should consider that you will probably need a significant nest egg in order to retire comfortably.
Generally, you may be better off at retirement by making your RSP contribution each year, and using your tax refund to pay down your mortgage.
You can transfer up to $50,000 of the accumulated investment income in a Registered Education Savings Plan (RESP) directly to your own or spousal RSP if you meet the following conditions:
As a Canadian taxpayer, you can open an RSP as soon as you have qualifying earned income. Even a child who has earned income can open an RSP.
The money invested in your RSP is always accessible. However, you should consider the consequences of early withdrawal.
While investing money in an RSP is tax deductible, when it is withdrawn, it is considered income and is taxed. When you withdraw a particular amount, you'll have to record both the withdrawal amount and lump sum tax on your income tax return.
Note: You can make a tax-free withdrawal from your RSP to buy a first home or to return to school.
The Home Buyer's Plan (HBP) is a federal government program that allows you to borrow up to $25,000 from your RSP – $50,000 per couple if both have RSPs – to buy or build a qualifying home without paying taxes on the withdrawn amount.
You must repay the borrowed money into your RSP within 15 years through annual contributions. If you don't, the annual minimum repayment amount must be included with your other taxable income in that tax year. For example, if you withdraw $15,000 from your RSP to purchase your first home, you must pay back at least $1,000 each year for 15 years.
The RSP Lifelong Learning Plan (LLP) is a federal government program that allows you to withdraw up to $20,000 from your RSP over a four-year period to finance full-time training or education for you or your spouse or common-law partner, without paying taxes on the withdrawn amount. The withdrawal is subject to a $10,000 annual limit.
You are eligible if:
Withdrawals must be repaid to your RSPs over a period of no more than 10 years. Any amount that you do not repay when it is due will be included in your income for the year it was due.
For BMO Term Investments a $50 fee (plus applicable taxes) applies for withdrawals and transfers from RSP investments. For BMO Mutual Funds, there is an annual RSP Administration fee of $10, plus applicable taxes. A fee of $50 (plus applicable taxes) may be applied to a registered plan account if and at such time you transfer it, in whole or in part, to another institution.
At the end of the year in which you turn 71 years of age, you must collapse your RSP.
Your RSP funds may be used to purchase a Registered Retirement Income Fund (RIF), a life or fixed-term annuity, or you may take the proceeds in cash. RIF and life or fixed-term annuity options provide income during your retirement years. You only pay tax on the portion you receive each year. If you choose the cash option, the entire amount will be included in your taxable income for the year you cash your RSP, and you will have to pay tax on it.
If you have named your spouse as beneficiary of your RSP, your RSP proceeds could be rolled into your spouse's RSP, RIF, or annuity, in which case no tax will be paid until the funds are subsequently withdrawn. The same tax treatment would apply if you have named a child or grandchild financially dependent on you because of physical or mental disability.
If you have not named a beneficiary, or if you have named a beneficiary other than your spouse or a financially dependent child or grandchild, the full value of your plan would normally be paid to your estate or to that beneficiary and be included in your taxable income in the year of death.
If you have a child or grandchild who is financially dependent on you (but not because of physical or mental disability), the funds from your RSP can be used to purchase a qualified term annuity for the dependent and be taxable to the child rather than to your estate. Depending on the age of a child, a special annuity can be purchased which allows payments and related taxes to be spread out over a period of years.
Fortunately, RSPs are no longer limited to the amount of foreign content they are permitted to hold. That’s good news when you consider that Canada represents less than 4% of the total world market. Investing globally allows you to take advantage of over 96% of investment opportunities, which could significantly impact the value of your investments over the long run.
By increasing the foreign exposure in your portfolio, in line with your investment objectives and risk tolerance, you’ll stand to profit from global opportunities, especially when the Canadian market is being outperformed. Talk to your investment professional about combining international opportunities with your Canadian investments.
