The Registered Retirement Savings Plan: An Important Piece of the Retirement Puzzle

While saving for retirement, you may have been contributing to a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA), or perhaps you have invested in various securities and mutual funds. You may be looking forward to the day you retire, but having a secure retirement also requires a successful retirement strategy. To help you prepare for retirement, you should understand some of the tools at your disposal. An important one that we will highlight in this article is the registered retirement savings plan.    

What is an RRSP?

The RRSP is now a staple retirement program for Canadian workers and retirement savers. It allows you to build your retirement savings out of the reach of the tax collector. Your money can grow or compound tax free. One of the RRSP’s greatest benefits is that it can allow for a current tax break as your contributions will not be taxed—potentially reducing your annual taxable income. This tax benefit may help you reduce your current tax bill and provide you with the opportunity to pay taxes later when your income tax rate might be lower or you may be able to find further tax relief depending on your situation.

Basic RRSP Contribution Limits and Restrictions

Your allowable annual contribution limit is based on your earned income. Here are some details:

• The maximum contribution allowance is based on 18% of your earned income with certain thresholds.^[i] The maximum contribution limit generally increases each year to account for inflation. And any workplace pension you might receive can affect your RRSP availability. The Canada Revenue Agency (CRA) website can answer questions about that pension adjustment.
• The CRA keeps track of your contribution space. You should find the amount listed on the notice of assessment that you receive after tax filing each year. You can also open a CRA account online to check your RRSP and TFSA contribution room. A TFSA is a tax-sheltered savings account that allows you to set aside money for life. Any contributions (up to your contribution room) and income earned are generally tax free, even when withdrawn.^[ii]
• You may not lose your unused RRSP room from previous years and may be able to carry forward RRSP room from one year to the next. Though, it may be best to consult with a tax advisor when determining if and how much unused RRSP you may be able to carry forward.
• You may also be able to set up a spousal account called a spousal or common-law partner RRSP. A spousal RRSP enables income splitting when funds are eventually used for retirement. If one spouse doesn’t work or earns a lower income, you could use the contribution space of the higher earner to contribute to the lower earner’s account.^[iii]

The Tax Man Will Eventually Have His Day 

Keep in mind that withdrawals from your RRSP account are taxed in full as income. But you may be able schedule your withdrawals to maximize tax efficiency with the help of a tax advisor. Also, some retirees may expect to have less taxable income in retirement compared to their working years. As a result, you may anticipate a smaller tax hit than if you’d realized that income during your working years.

While you can withdraw money out of your RRSP sooner, at age 71, you are mandated to withdraw the funds, transfer them into a Registered Retirement Income Fund (RRIF) or use them to purchase an annuity.^[iv] An RRIF is a registered retirement fund that provides a steady income in retirement. You can begin minimum payments in your 72^nd year, and you are free to withdraw more than the minimum.

Annuities are another option for RRIF retirement funding. But annuities can be complex and can come with high fees, illiquidity and other restrictions. We believe other options are more efficient and effective for building reliable retirement income compared to locking up your money with an insurance company.

The RRSP is one important piece of the retirement puzzle. If you start early and invest regularly, you can experience the magic of compounding over your investment time horizon.

Fisher Investments Canada Can Help

If you have retirement savings and are looking to create a personalized portfolio that is tailored to your needs, Fisher Investments Canada may be able to help you put your RRSP to work as part of a comprehensive retirement plan. Contact us to speak with one of our qualified professionals and to learn more about what we can do for you.

^[i] Source: Government of Canada, as of 5/7/2019.  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html#whtddctnlmt.

^[ii] Source: Government of Canada, as of 5/7/2019.  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions-withdrawals-transfers.html.

^[iii] Source: Government of Canada, as of 5/7/2019.  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/definitions-rrsps.html#partner.

^[iv] Source: Government of Canada, as of 5/7/2019.  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/rrsp-options-when-you-turn-71/options-your-rrsps.html.