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Understanding RRSPs

    A first-timer’s guide to

    Registered Retirement Savings Plans


    You’re ready to get serious about your savings, but now you have to decipher all the savings lingo. We know the struggle, and we’re here to make it that little bit easier with our guide to one of the most popular savings solutions—the RRSP.

    What is an RRSP?


    A Registered Retirement Savings Plan (RRSP) is a government approved plan through which you save money for your retirement years. You can also use an RRSP to fund your post-secondary education or the purchase of a home. Your contributions, within limits, are tax-deductible, and the income earned is tax-sheltered. You can have any number of RRSP plans.

    What can you do with the proceeds from your RRSP?


    Once you reach retirement, you can use the money saved as retirement income. This solution enables you to spread out the taxation of your accumulated savings over your retirement years as payments are taxed as you receive them.

    You can also withdraw from your RRSP without immediate taxation to purchase a home, typically your first, or fund you or your spouse or common-law partner’s post-secondary education. You are then required to repay the amount withdrawn from your RRSP without interest according to a specific schedule. It’s important to consider the loss of the compounded earnings when you consider these kinds of withdrawals. Even if you make your repayments as required, there may be a substantial reduction in the value of your RRSPs by the time you retire.

    Depending on the original conditions of your RRSP, funds can be withdrawn, in whole or in part, from your plan outside of retirement or your project to buy a home or attend school. The money you withdraw in those instances is immediately taxable.

    Anyone with earned income subject to Canadian taxation, including non-residents, may contribute to an RRSP. Even if you have an income below the taxable threshold, you should file a tax return to report your earned income and create RRSP deduction room. Contributions can be made until the end of the year during which the plan holder turns 71.

    You can make part or all of your contributions to a plan in your own name or to a plan in your spouse or common-law partner’s name. You, as the contributor, are still entitled to the tax deduction.
    Each year, there is a set RRSP contribution limit. That limit is 18% of your earned income, up to a certain threshold determined by the Canada Revenue Agency (CRA), plus any unused contribution space you have accumulated in years past. Sound complicated? The CRA does the math for you and tells you what your yearly contribution limit is on your Notice of Assessment, which you can access online anytime.

    It’s important to stay within that limit. If you don’t, the CRA charges a hefty over-contribution fee. An over-contribution of up to $2,000 is permitted, but once you cross that threshold, you will pay a 1% penalty tax per month on the amount in excess of $2,000.
    Because your RRSP contributions are tax-deductible, you can deduct the amount that you put into your RRSP from your taxable income. You can choose to do this in the year that you make the contribution, or you can choose to carry some or all of those deductions over to a future year. This applies whether or not you actually make a contribution.
    But why wouldn’t you take the full tax deduction ever time? If you know that you’re likely to earn more in future years, because you’re early in your career or expecting a promotion, you might to hold onto some of those deductions and apply them to your future higher income.
    For those who consistently deduct the same amount that they contribute to their RRSP, their contribution and deduction limits will be the same. For those who choose to defer any of their deduction to a future year, the deduction limit will be higher. You can see your deduction limit in your online CRA account
    There are three basic types of individual plans available: deposit type plans, mutual funds, and self-directed plans. In recent years, group RRSPs have also become increasingly popular.
    Deposit-type plans 
    Deposit-type RRSPs are the most common plans. They offer familiar savings options including savings accounts, term deposits, or guaranteed investment certificates. 
    The rate of interest may be variable, fixed or index linked. Key choices include the term of the deposit (ranging from daily to multi-year); and frequency of interest calculations and payments to the RRSP (daily, monthly, annually, or end of term). Key considerations include the issuer’s policy regarding early withdrawals (your investment may be non-redeemable for the term) and deposit insurance coverage. 
    Mutual funds 
    There are many types of mutual funds available. You may have heard of money market funds, income funds, equity funds, and balanced funds as these are the most common. Each of these has a different investment strategy: 
    • Money market funds invest in short-term securities such as treasury bills, and government and corporate notes.
    • Income funds can hold short-term securities, but predominantly invest in longer term bonds, mortgages and other stocks that generate income (i.e., dividend-paying stocks).
    • An RRSP-eligible equity fund invests primarily in stocks.
    • Balanced funds hold all three types of investments. 
    Since mutual fund investments fluctuate in value, they don’t provide a guaranteed rate of return. Sales fees, called front-end or back-end loads, can be charged on the acquisition or redemption of units. In addition, all mutual funds pay management fees.
    Self-directed plans 
    With this kind of plan, you make all your own investment decisions within a wide range of qualified investments and with the administrative support of a trustee. A self-directed plan may be uneconomical for those with limited RRSP funds, because of the normal administration and transaction fees.
    Self-directed plans are suitable for those with considerable investment experience and ample time to manage the funds, or for those who want all their RRSP investments within one plan. A self-directed plan may be uneconomical for those with limited RRSP funds, because of the normal administration and transaction fees. 
    Group plans 
    In a group plan, each participating employee has an individual account that is maintained within the group RRSP. Group plans can have the same investment options as the other types of plans.
    Contributions to group RRSPs by employers and employees are usually voluntary. As the employee you gain non-forfeitable rights over any employer contribution as soon as that contribution is made, although you may not have immediate access to it. When the employment terminates, any restrictions imposed by the employer on the withdrawal or transfer of funds from the group RRSP cease. 
    Always be sure to ask about fees before deciding which RRSP is best for you. Not all issuers charge fees, but many do, and depending on the type of fee they can add up to represent a significant reduction in the net yield from your plan.
    The relative risks of RSSP investments depend on the type of plan. Before you invest in any RRSP, you should discuss your risk tolerance with a Credit Union investment advisor.
    It’s important to educate yourself about your options when choosing to invest in an RRSP. This first-timer’s guide to RRSPs is a sample of the basics you should understand about these plans. If you’re interested and want to learn more, contact us. We're here to support you in your investing projects. You shouldn’t have to think through all of this alone—nor do you have to!

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