What is an RSP?
A registered Retirement Savings Plan (RSP) is a personal savings plan registered with the Canadian federal government allowing you to save for the future on a tax-sheltered basis.
What makes RSPs special is that your contributions to it are tax deductible and your portfolio grows tax sheltered. If you are under 70 years of age and earn income, we encourage you to take advantage of the benefits an RSP can offer.
What are the Benefits of RSP?
While designed specifically as a retirement vehicle, an RSP has benefits throughout your lifetime.
- By contributing to an RSP throughout your working career, you'll realize immediate tax benefits at a time when your income is generally highest. The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year.
- The income earned in your RSP is not taxed until it is withdrawn. While your investments sit in your RSP their growth is tax sheltered and so the total value may grow more quickly.
- By the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. Funds withdrawn at that time will benefit from this lower tax rate.
Can I withdraw money from my RSP?
You can withdraw money from your RSP for the following reasons:
- Emergencies - Your RSP holdings can be used to cover an emergency situation. However, there is a tax consequence to doing so and an impact on your retirement plan. Any withdrawal is considered taxable income for the year and a withholding tax will be charged upfront when you withdraw the funds
- Home Buyers Plan - The Home Buyer's Plan allows you to borrow funds from your RSP to purchase your first home. If you qualify, you and your spouse can each borrow up to $25,000 - a total of $50,000 - from your RSPs to use as a down payment. The funds withdrawn are not subject to withholding taxes, nether are they included in participants income.
- Lifelong Learning Plan - The Lifelong Learning Program allows you to withdraw up to $10,000 per calendar year from your RSPs to finance full-time training or post-secondary education for you or your spouse. The funds withdrawn are not subject to withholding taxes, nether are they included in your income.
Who should have an RSP?
Every individual who works, files a Canadian income tax return, and looks forward to secure retirement should consider having an RSP.
- People, who earn income through their employment or self-employment, can reduce their annual tax bill while saving for their future through an RSP.
- For people who have a company pension plan, RSPs add extra comfort that their retirement needs are met; for those that don't have company pension plans, RSPs may be the foundation for funding their retirement.
- Married couples where one spouse earns more income than the other can reduce their combined tax burden through a spousal RSP. At retirement an income-splitting strategy can be applied to reduce overall tax when the funds are withdrawn.
- If you are planning on purchasing your first home or are interested in continuing your education you can contribute to an RSP then use these funds, as a source of financing.
- If you anticipate fluctuations in your income because of maternity leave, career change or employment interruptions, the funds in an RSP are always available to you.
What Types of RSPs are available?
RSPs can be for an individual only or placed in the name of a spouse.
Individual RSP - The most common type of RSP is a plan that is registered in the name of the person contributing to it. The investments held in the plan and the tax benefits derived from it are the contributor's.
Spousal RSP - In a spousal RSP, the plan is registered in the name of the spouse of the person contributing to the plan. The spouse owns the investments held in the plan. The tax deduction flows to the contributor.
The key reason for setting up a spousal RSP is to facilitate income splitting. Income splitting is the transferring of money to a lower-income-earning spouse, so that in the future, income is taxed at a lower tax rate
How much can I contribute annually?
You may contribute to your RSP until December 31 of the year in which you reach age 71. The following limits and deadlines apply annually.
RSP Contribution Maximum - The maximum annual contribution limit is 18% of 2008 income with a limit of $20,000 in the year 2009.
Your allowable RSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, or
- The remaining limit after any company sponsored pension plan contributions
Earned income includes salary or wages, alimony received, and rental income, among other income sources but does not include items such as investment income.
You'll find the exact amount you can contribute to your RSP for the current year reported on the Notice of Assessment from your previous year's tax return.
I have a company Pension Plan; can I still contribute to an RSP?
As a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RSP must be reduced by the total value of the pension credits you earned for the year.
This amount is referred to as a pension adjustment (PA) and it is reported on the T4 slip (Statement of Remuneration Paid) that you receive from your employer.
What happens to my RSP when it's time to retire?
Whether you are retired or you are still working, you may keep or withdraw/convert your RSPs anytime until the year in which you turn 71 at which time you may choose from the following options: (1) withdraw your RSPs, (2) transfer your RSPs to a Retired Income Fund (RIF), (3) use your RSPs to purchase an annuity for life or, (4) use your RSPs to purchase an annuity spread over a number of years.
What happens to my RSP when I die?
The value of your RSP is paid to the beneficiary you have designated. If you have not designated a beneficiary, it is paid to your estate. In certain cases, including if your beneficiary is your surviving spouse or common-law partner, your RSP may be transferred to them on a tax-deferred basis. You should consult your District Taxation Office or legal and tax advisors for more specific information.
I didn't maximize my RSP Contribution last year. Is there anything I can do?
If you don't contribute the maximum amount allowable to your RSP in any year, you can carry the unused portion forward indefinitely. Any amounts "carried forward" should be reflected in the statement provided by Canada Customs and Revenue Agency with your "Notice of Assessment".
Does it make sense to borrow money for my RSP contribution?
Your RSP contribution could be the most important investment you make every year. So even if you haven't got cash on hand now, it can pay to borrow with an RSP Loan or Line of Credit. But don't forget, credit applications are subject to meeting the financial institution's lending criteria, and using borrowed money to finance the purchase of securities involves greater risk than a purchase using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
What is the over-contribution limit?
There may be years when you have more cash available for your contribution than in other years. If your annual contribution exceeds your contribution limit, RSP regulations permit an over-contribution balance totaling not more than $2,000. (If your over-contribution exceeds $2,000, you may be assessed a penalty of 1% per month on the excess amount.) While you won't get a tax deduction for any over-contribution in the year it is made, you can claim it as part of your contribution limit in subsequent years.
What is the foreign content limit for RSPs?
The foreign property limit of 30% you were allowed for foreign property in RSPs or RRIFs, is cancelled effective January 1, 2005. This allows more international diversification opportunities for retirement investments.
In some cases, a share or debt of a Canadian investment becomes a foreign property for an RSP when the shares or debt derive their value mainly from foreign property.
What is the Home Buyers Plan (HBP)?
The HBP is a program that allows you to withdraw up to $25,000 from your registered Retirement Savings Plans (RSPs) to buy or build a qualifying home. However, the program sets out certain conditions for participation. If an individual meets all the applicable HBP conditions, the withdrawals will not have to be included in his or her income, and the RSP issuer will not withhold tax on these amounts. If you buy a qualifying home with your spouse or common-law partner, or with other individuals, each of you can withdraw up to $25,000.
Under the HBP, you have to repay all withdrawals to your RSPs within a 15-year period. Generally, you will have to repay an amount to your RSPs each year, starting the second year after the funds are withdrawn, until you have repaid the total amount you withdrew. If you do not repay the amount due for a year, it will have to be included in your income for that year.
What is a Lifelong Learning Plan (LLP)?
The Lifelong Learning Plan (LLP) allows you to withdraw amounts from RSPs to finance training or education for you or your spouse or common-law partner. You cannot use the RSP funds to finance a child's education, such as your child or the child of your spouse or common-law partner.
You can make withdrawals from more than one RSP as long as you are the annuitant (plan owner) of each RSP. Your RSP issuer will not withhold tax on these amounts. Although the maximum amount that you can withdraw is $20,000, there is an annual limit of $10,000. There is no limit on the number of times you can participate in the plan over your lifetime. Starting in the year after you bring your balance to zero, you can participate in the LLP again and withdraw up to $20,000 over a new qualifying period. Generally, you will not be allowed to withdraw funds from your locked RSP.
You do not have to include eligible withdrawals in your income when you withdraw funds from your RSP under the LLP; however, you must repay the amounts over a specified period of several years.