The RRSP: An essential tool for achieving financial independence

What is an RRSP?

A registered retirement savings plan (RRSP) is a tax-sheltered investment instrument that is an effective way of saving for retirement. RRSP contributions are tax deductible, and the income earned within the plan is tax deferred. Canadian individuals who have RRSP contribution room may contribute until the end of the year in which they reach the age of 71.

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HOW DOES AN RRSP WORK?

Contribution limits

• Your annual contribution limit is 18% of your earned income from the previous year, up to a pre-determined limit.
• For the 2019 tax year, the limit is $26,500.
• To contribute the maximum, your earned income in 2018 must have been at least $147,222.

For more details about contributions limits, visit the Canadian Revenue Agency.

DEADLINE

• RRSP contributions in 2019 and in the first 60 days of 2020 may be deducted from your 2019 income tax.
• The deadline for contributions that you wish to claim on your 2019 tax return is therefore March 2, 2020.

Carrying your contribution room forward

If you do not use all of your contribution room in a given year, the remainder may be carried forward to future years. Look for your RRSP Deduction Limit Statement on the Notice of Assessment that the Canada Revenue Agency sends you each year.

Spousal RRSP

You may contribute to an RRSP for yourself or for your legal or common-law spouse. 

In the case of a spousal RRSP, the account is opened for your spouse, but you receive the RRSP deduction.

Tax receipts for RRSP contributions are in the name of the contributor, not the account holder.

HBP

The Home Buyers’ Plan (HBP) allows you to make a tax-free withdrawal from your RRSP to finance the purchase or construction of a property. The 2019 budget increases the HBP withdrawal limit to $ 35,000 (the amount was previously $ 25,000). This applies to withdrawals made after March 19, 2019.

To avail yourself of the HBP, you must meet the eligibility conditions for the HBP and for an RRSP withdrawal.

For more details about the HBP, visit the Canadian Revenue Agency website.

LLP

The Lifelong Learning Plan (LLP) allows you to make a non-taxable withdrawal to finance a return to school, for yourself or for your legal or common-law spouse. Each of you may withdraw up to $10,000 a year, to a maximum of $20,000 for the period you take part in the LLP.

For more details about the LLP, visit the Canadian Revenue Agency website.

REPAYMENT TO THE RRSP

In the case of an HBP or an LLP, the amounts must be repaid to the RRSP over a specific period and some conditions apply

EXCESS CONTRIBUTIONS 

Contributions in excess of the limit will result in a penalty equal to 1% of the excess amount per month. However, an excess contribution of up to $2,000 is allowed (non-cumulative lifetime limit).