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RRSP Basics: What you need to know

With the variety of savings account options available to Canadians today, trying to decide where to save your money can be tricky, but if you’re saving for retirement, a Registered Retirement Savings Plan (RRSP) is a popular option. 

Here’s what you need to know about opening an RRSP, how you can use one, and how to access your funds in retirement, or earlier if needed.

What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a retirement savings account for Canadians. Your contributions and the income generated within the RRSP are tax-free. With a couple of exceptions (the Homebuyers Plan and the Lifelong Learning Plan, both discussed in more detail below), taxes are deferred until you withdraw the funds, the idea being that if you wait until retirement to withdraw the funds you’ll be in a lower tax bracket than you were when you made the contribution. 

Contributing to Your RRSP
Your RRSP contributions are capped at 18 percent of your previous year’s income, to a maximum of $26,230 for the 2018 tax year less a pension adjustment as noted on your most recent Notice of Assessment. You may make additional contributions if you haven’t used up all of your previous years’ unused contribution room (going back to 1991).

Think of an RRSP as an investment basket in which you can hold different types of investments; GICs, stocks, mutual funds, exchange-traded funds, and even cash may all be held in your RRSP. 

Save on Taxes with Spousal RRSPs 
For some families with spouses in different tax brackets, having the higher earning spouse contributing to a spousal RRSP for the lower-earning spouse makes good financial sense. This results in a higher tax refund today and a lower tax rate at withdrawal, assuming today’s lower-taxed spouse is tomorrow’s lower-taxed retired spouse. 

Convert RRSPs to RRIFs to Access Funds in Retirement
December 31 of the year you turn 71 is the last day you may contribute to your RRSP. After that, it’s time to start withdrawing from your RRSP. You do this by converting your RRSP to a Registered Retirement Income Fund (RRIF), purchasing an annuity, or both. Remember, while the amount you’re required to take as RRIF or annuity payments depends on your age, your withdrawals will be taxable.

Withdraw From Your RRSP to Buy a Home
The Homebuyers’ Plan (HBP) allows first time homebuyers struggling to come up with a down payment to make tax-free RRSP withdrawals of up to $25,000 to purchase a home. You will then have 15 years to make equal installment contributions back to your RRSP to replace the funds you withdrew under the program. If you miss a contribution, that year’s amount will be added to your taxable income for the year.

Withdraw From Your RRSP to Pay for Your Education
Thinking about going back to school full-time to pursue a post-secondary degree or diploma? If so, withdrawing up to $20,000 from your RRSP under the Lifelong Learning Plan (LLP) may make sense. You can make tax-free withdrawals of up to $10,000 each year to help cover education costs while attending an eligible university or college. You will then have 10 years to make equal annual installment contributions to your RRSP to replace the funds withdrawn under the LLP. If you miss a payment, the amount will be added to that year’s taxable income.

Note: You have until March 1, 2019 to make your 2018 RRSP contribution. 

Learn more about RRSPs or speak to a Meridian Advisor today.