Do you want to learn more about Registered Retirement Savings Plans (RRSPs)?To begin, here are the answers to 10 of the most common questions Canadians ask about them.
1. What is an RRSP and how does it work?
An RRSP is a retirement savings investment account registered with the Canada Revenue Agency (CRA). It offers Canadians benefits that help them save for retirement. The money you contribute to an RRSP is not taxed as part of your income, meaning you pay less income tax now.
An RRSP is not a typical savings account. It is a plan where you pool your investments so they can grow tax-free until you start withdrawing funds. Typically, you will be retired when you withdraw your money. As a result, you will pay less tax compared to the years when you earned more, allowing you to keep more of your money for retirement.
2. How much can I contribute to my RRSP this year?
You can find your RRSP contribution limit (the maximum amount you can contribute) on your latest Notice of Assessment. You can also find it by logging into your CRA My Account.
In general, the CRA calculates your contribution limit as follows:
• Take the total of your unused contribution room from the previous year.
• Add the lower of the following amounts:
- 18% of the earned income reported on your last year’s tax return
- $31,560 (the annual limit for 2024)
- Minus the previous year’s pension adjustment (if applicable)
3. What happens if I contribute too much to my RRSP?
You will have to pay a tax penalty of 1% per month on any amount that exceeds your contribution limit by more than $2,000. If you do not pay the additional tax within 90 days of the calendar year, you may be subject to late filing penalties or interest charges.
4. When should I start contributing to my RRSP?
Although everyone’s financial situation is different, it is generally recommended to start saving for retirement as soon as possible. This allows you to take advantage of compound growth.
5. What types of investments can I hold in an RRSP?
You can hold various types of investments in an RRSP. Your investment options will depend on what is offered by the financial institution where your RRSP is held.
6. What are the tax benefits of contributing to an RRSP?
You do not have to pay tax on the money you contribute to an RRSP in the year you contribute. Additionally, the money invested in your RRSP grows tax-free.
7. When will I have to pay taxes on my RRSP?
Generally, you will only pay tax on your RRSP funds when you make a withdrawal.
8. Can I use my RRSP to buy a home?
If you qualify as a first-time homebuyer, the Home Buyers’ Plan allows you to withdraw up to $60,000 from your RRSP to buy or build a home. Within a period of up to five years after withdrawal, you must start repaying the withdrawn amounts over a 15-year period.
9. Can I borrow money from my RRSP for education?
The Lifelong Learning Plan allows you to withdraw up to $10,000 from your RRSP in a calendar year tax-free to pay for full-time training or education for yourself or your spouse or common-law partner. You can withdraw up to $20,000 per calendar year under this program.
10. What happens to my RRSP when I retire or turn 71?
You can choose to withdraw your RRSP as a lump sum or convert it into a retirement income product, such as a Registered Retirement Income Fund (RRIF), before the end of the year you turn 71.
The deadline to contribute to an RRSP for 2024 is March 3, 2025.
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