Ultimate RRSP Guide - Definitions, Deadlines, Maximums, Investments, Tools

Saving money for your retirement is a more enticing proposition when you know the ins and outs of RRSP's (Registered Retirement Savings Plans). Our Ultimate RRSP Guide will help walk you through some of the more basic RRSP related questions as well as some of the more complicated ones that face Canadians; especially when tax time comes around. It's important to note that our explanations are in line with how the Canada Revenue Agency administers the plan, but if you should ever desire some of the information directly from the horse's mouth, you can visit the CRA's RRSP Page.


What is an RRSP?

An RRSP (Registered Retirement Savings Plan) is an investment and savings vehicle offered by the Canada Revenue Agency that allows Canadians to defer the tax they pay on their income by saving money for their retirement, future home ownership, or continued education. An RRSP account holder can add money to their account in the form of a number of approved investment types and every dollar that is added to their account throughout the year is then deducted from their taxable income. To make that a little simpler, if you make $55,000 a year and deposit $3,000 to your RRSP, you will only pay tax on $52,000 ($55,000 - $3,000). If you pay taxes on your pay check throughout the year, you typically receive a refund to make up the difference. back to top...

What are the Different Types of RRSPs?

Individual RRSP - This is what most people will hold. It has just one account holder and contributor.

Spousal RRSP - This allows one spouse to contribute to another's so that they can take advantage of income splitting when they enter retirement and start withdrawing RRSP funds.

Group RRSP - This one is just like an individual except it is offered as part of a benefits plan through an employer. The most noticeable difference with this type of RRSP is that the account holder is able to benefit from the tax advantages that come from deposits all the way through the year rather than in just one lump sum in their tax refund.

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What Types of Investments can an RRSP Hold?

Savings Accounts - This one is just as simple as it sounds. It operates just like the regular savings account that you have with your bank of credit union, but it is held within the confines of a Registered Retirement Savings Plan.

Guaranteed Investment Certificates - One of the safest investments that you can make, GIC's offer the buyer a guaranteed return over a fixed period of time.

Bonds - A bond is a debt security. You are basically loaning money to an entity and as part of the bond agreement, you receive regular interest payments.

Mortgage Loan - This one is also just as it sounds. You can lend money to an entity so that they may purchase real estate. You receive interest payments on your investment.

Income Trusts - These are made up of a collection of financial instruments (debt equities, real estate, etc...) with the main goal of the trust being that the investors in it should receive regular income payments in the form of dividends.

Mutual Funds - These are managed funds that come in many different shapes and sizes. The idea behind them is that they allow you to make a single investment in a fund that offers a particular portfolio balance and all of the constant rebalancing that is needed is done by the company offering the Mutual Fund. In short, they allow you to have an appropriately balanced portfolio that you don't personally need to oversee and balance.

Labour Sponsored Funds - A Labour Sponsored Fund is a fund managed by investment professionals and invested in small to mid-sized Canadian companies. There is often a special tax credit given to Canadians that invest in these funds and that tax credit is applied in addition to the credit you receive for your RRSP contribution.

Corporate Shares - These are company shares that are often offered to employees as incentive or bonus payments.

Foreign Currency - Strange as it may sound, you can choose to purchase currencies other than Canadian currency as part of your RRSP.

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How Do I Get an RRSP?

Getting an RRSP is actually a fairly easy process. Almost any financial institution can set up an RRSP account for you and a lot of people simply choose to do this at the bank or credit union that already holds their chequeing account. You can usually go in and do this without an appointment, but if you're pressed for time and looking to make an investment decision as well, call ahead and just tell them that you'd like to meet with someone about starting an RRSP. They'll take care of the rest.

It's important to know, however, that you can have more than one RRSP account. Your contributions to all of them count as one large lump sum contribution, but you can have multiple accounts and they can be held at multiple financial institutions. For example, if you want to have a part of your RRSP invested in something that you personally manage (things like stocks or GICs), you can set up an RRSP account at an online brokerage. You can make trades online and see just what your investments are doing in real time throughout the active trading day.

If you're interested in doing this, we recommend that you take a look at Questrade. They offer low trading fees and the ability to invest in everything from Mutual Funds to foreign currencies. back to top...

How Much Will My Refund Be?

This depends on your personal tax situation so the numbers here are just approximate. The first thing to know is that you will only receive a refund if you've already paid taxes in a particular year. This applies to most people who receive regular bi-weekly pay checks in their job. Tax is typically taken off of checks before they are passed onto employees. If this doesn't apply to you, then it simply means that your tax bill at the end of the year will be lower. You won't receive a refund, but then that just means the Canada Revenue Agency never had your money in the first place.

The second thing to know before we get to the math here is that we are going to leave out a few things that can make the calculation seem too confusing at first. The first thing we're going to leave out is the stratified tax rates. For the calculation below we will just use an average tax rate of 25%. The second thing were going to leave out is any trace of tax credits or the basic personal amounts. There are too many factors that go into awarding these and it would render the example useless for anyone that doesn't fit the very specific criteria used. Here we go:

• John Doe earned $55,000 at his job last year.
• John paid $15,000 in taxes via deductions by his employer
• John contributed $10,000 to his RRSP savings account

If we take John's salary and multiply it by the average tax rate of 25%, we see that he owes the CRA a grand total of $13,750. Since he's already paid $15,000 in taxes, it means that he is already owed some money. That amount equals $1,250. Without his RRSP contribution, this would be the end of the story. What happens now, however, is that the entire calculation is done all over again with John's income being reduced by the exact amount he contributed to his RRSP ($55,000 - $10,000 = $45,000). Now when we take his income and multiply it by the tax rate of 25% ($45,000 * 25%) we see that he only owes $11,250 in taxes. He's already paid $15,000 in taxes, so his total refund with the RRSP contribution factored in will be $3,750. The total immediate financial gain for John is $2,500. back to top...

How Do I Find Out My RRSP Personal Contribution Limit?

There are several different ways that you can find out your personal RRSP contribution limit each year. The easiest way is to look at your previous year's Notice of Assessment. It will be amount A in the RRSP/PRPP Deduction Limit Statement portion of your assessment. You can also log into your online CRA account or call the Tax Information Phone Service. back to top...

How is your RRSP Contribution Limit Calculated?

You contribution limit is calculated as 18% of your earned income for the year up to a pre-set maximum. Since the Canada Revenue Agency gives Canadians two months after the end of the tax year to make qualifying RRSP deposits, contributors can ensure that they are depositing an appropriate amount before filing their taxes. If you don't get a chance to deposit your maximum in a particular year, you can take advantage of roll over. Unused deposit limits are rolled over for individuals from year to year. As for the absolute upper contribution limit each year. It is set annually by the Canada Revenue Agency and rises every year. Check out the section below for the current as well as historical limit. back to top...

RRSP Limits Current and Historical


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