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Sun Life Registered Retirement Savings Plan (RRSP)

The contributions made to an RRSP are tax-deductible. Even the taxes on any investment growth are deferred until the money is withdrawn from the plan.

What is an RRSP?

A Registered Retirement Savings Plan is a smart way to save your money. It is a personal savings account that provides multiple tax benefits and can hold a variety of investment formats such as treasury bills, guaranteed interest products, mutual funds, segregated fund contracts, bonds, and even equities. Registered guaranteed investment contracts are a form of RRSP itself.

How does an RRSP provide tax benefits?

The contributions made to an RRSP are tax-deductible. Even the taxes on any investment growth are deferred until the money is withdrawn from the plan. This means that your income will be safe to use, whether it is for your current need or for your future savings. Any withdrawals from your RRSP are taxable. Most individuals start withdrawing money from an RRSP only when they are retired. At this time, you will be in a lower tax bracket and will be liable to pay a lower tax amount. This can help you keep more money than what you will be paying in taxes.

An RRSP is right for you if:

  • You want tax benefits in the current financial year. You will be able to deduct the contributions from your yearly income.

  • You want to save money for your retirement years

    • You want to reinvest your tax savings into more profitable ventures

    • $75,000

    • You want to use these savings to pay off debt

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Types of RRSPs:

1. Individual RRSP

As the name suggests, this RRSP is owned by an individual. The contributions are made only by the owner of the plan.

  • The amount paid for this plan is tax-deductible. Withdrawals are taxable.

  • If you are eligible to receive a registered company pension, you can transfer it to this plan. However, you cannot withdraw this amount until you retire.

2. Spousal RRSP

This type of RRSP is registered in the name of one spouse. The contributions to this RRSP are made by the other spouse.

Policy Details

Eligibility

  • Your contributions, whether to your own or to your spouse’s, will be counted against an RRSP contribution limit. Your spouse’s limit will not be affected even if you contribute to their account.

  • If you have contributed to your spouse’s spousal RRSP and they end up withdrawing money from it within 3 calendar years, the tax on the withdrawal is paid by you.

  • Upon retirement, both you and your spouse are free to withdraw income from your respective retirement funds. You will be taxed at individual rates.

Guaranteed Premiums

3. Group RRSP

This type of RRSP is usually set up by a company or professional organization for a group of their employees. It is in the name of a “group”.

  • The members of such an RRSP will benefit from administration and management fees that are lower than those applied to an individual RRSP.

  • This plan can be contributed to with payroll deductions. This makes you eligible to contribute throughout the year. You will still have to ensure you are staying under the limit for contributions.

RRSP Contribution Rules

How much can I contribute to an RRSP?

RRSP contributions are a lucrative way to watch your savings grow without worrying about taxes. However, even they have their limits. According to the CRA or Canada Revenue Agency, an individual can pay 18% of their previous year’s income to an RRSP. The CRA submits a report to you mentioning your limit. If you have not reached your limit in the previous year, this will be added as contribution room to your current year, thereby increasing the total value of contributions allowed.

Who can contribute to an RRSP?

An individual can contribute to an RRSP until they reach 75 years of age. This is subject to the contribution room available.

When can you contribute to an RRSP?

You can contribute to your RRSP at any time during the year, and the contributions can be made either in small amounts or in one lump sum up to the contribution limit. 

You can even make contributions to your RRSP, without affecting your tax bill, 60 days after the year has ended. However, after this, it will affect your tax bill. 

The government has made exceptions in the following cases:

  1. a) The 60th day is a public holiday

  2. b) The 60th day falls on a Saturday or Sunday

  3. c) There has been a natural disaster that has restricted individuals from making contributions

The best way to ensure you are making the most out of your RRSP is to have a regular savings schedule. You can invest smaller amounts at regular intervals to reduce the burden of saving a large lump sum every year or worrying about market fluctuations during your contributions.

What happens if I don’t contribute the full amount allowed?

There is no penalty added if you don’t contribute the full amount added. The following two scenarios can take place:

  1. You carry forward the remaining room. The amount of money you have not been able to contribute will be added as an unused contribution room indefinitely, till it is filled or you reach 71 years of age. You can utilize it in the upcoming years until then.

  2. If you have a set goal and your financial circumstances do not allow you to meet them, you can even take an RRSP loan. The payment for this loan can be done using the income tax refund you will get.

RRSP Vs. TFSA

Confused whether to opt for an RRSP or TFSA?

Sun Life insurance, with the help of the following charts, provides a comparison of the two to help you make an informed decision.

RRSP and TFSA Basics

What is an RRSP?

An RRSP or Registered Retirement Savings Plan is a smart way to save without having to worry about tax payments. It can hold multiple forms of investments and provides tax deductions on contributions made during the year. The amount is taxed only upon withdrawal.

Uses of an RRSP:

An RRSP can be used to purchase a home, complete your education, or just enjoy your retirement years with your spouse.

What is a TFSA?

A Tax-Free Savings Account allows you to save money without having to pay tax on them. TFSAs can also hold multiple investment formats like bonds, stocks, mutual funds, etc.

The contributions made to a TFSA are already taxed. That is, you pay the income tax on the amount you contribute. When you withdraw from a TFSA, you do not have to pay any income tax. You also do not have to pay income tax on the investment gains you receive.

Uses of a TFSA:

Withdrawals can be made at any time and for any reason. You can use the amount to pay for a wedding, a vacation, to buy your dream home, or even to provide financial support to your family members.

Contributions towards an RRSP and a TFSA

Question

RRSP 

TFSA

What is the contribution limit?

The limit is calculated each year and is sent to you by the Canada Revenue Agency after filing taxes for the previous year.

The limit for 2020 is $6000. 

Can you carry forward the unused contribution room?

Yes

Yes

If you make a withdrawal, will you be able to regain contribution room?

No. But there are exceptions to this.

Yes. The amount withdrawn will be added as contribution room in the following year.

Is there a maximum age limit to make contributions?

Yes. Contributions can be made till the end of the year you turn 71 years of age.

No.

When can you contribute to the plan?

If you have contribution room, you can contribute at any time until the end of the year. The maximum time limit is 60 days after the end of the year.

You can make contributions at any time, depending on the amount of contribution room available.

Taxable benefits of an RRSP and a TFSA

Question

RRSP

TFSA

Are contributions tax-deductible?

Yes

No

Are withdrawals subject to income tax?

Yes

No

Do the withdrawals count towards my taxable income?

Yes

No

Is investment growth taxable?

Only when you withdraw it.

No.

How does opening an RRSP and a TFSA affect your government benefits?

Question

RRSP

TFSA

Is there an age limit for opening an account?

No. Contributions can be made as soon as there is contribution room.

Yes, you need to be at least 18 years of age.

Do my savings need to be converted into income.

Yes, they will have to be converted when the plan owner turns 71. This can be done by the end of the year of their 71

st

birthday.

No.

Will government benefits like Old Age Security (OAS) or Employment Insurance (EI) be affected?

The funds you withdraw from your RRSP will be considered as income and hence you will not be eligible for these plans.

No. They will not be affected by the income earned or the amount withdrawn from your TFSA.

When might an RRSP or a TFSA be right for you?

An RRSP is right for you if:

  • You want to use the money you have saved during your retirement years

  • You want to pay less tax on the income you have saved. Since you will be withdrawing the amount when you have retired, you will be in a lower tax bracket, which will result in tax savings.

  • You want to buy a home. The amount saved in your RRSP can be used to make a down payment.

  • You want to fund your spouse’s education under the Lifelong Learning Plan.

A TFSA is right for you if:

  • You want to buy a car

  • You want to make a down payment on your house

We have mapped out a few scenarios in which we display the use of an RRSP and TFSA to make the decision easier for you.

Situation

RRSP

TFSA

You want to buy your dream home.

You can borrow up to $35,000 from an RRSP to make the down payment if you are a first-time homebuyer.

You can use your tax-free withdrawals to make a down payment and even mortgage payments whenever you like.

You want to settle down with the love of your life.

Withdrawals from an RRSP are taxable. Starting a family can be expensive, so an RRSP withdrawal can be avoided here.

You can make tax-free withdrawals from your TFSA to finance vacations or a wedding.

You want to start a family.

You can contribute to your RRSP regularly and start building your savings.

With your TFSA you can make tax-free withdrawals to pay for baby care expenses.

You want to see the world.

Withdrawals are taxable, so you can avoid an RRSP for this.

Use a TFSA and fund any vacation to any location.

You want to study.

An RRSP Lifelong Learning plan can be used to borrow up to $10,000 per year.

You can even use a TFSA to pay off tuition fees and free up contribution room. This can be used to save money after you graduate.

You want to save for retirement.

Continue contributing to your RRSP and try to reach the limit every year.

Continue growing your investments in a TFSA and make withdrawals once you are close to retirement.

You want to retire.

Save money till the age of 71. Making withdrawals after this age will ensure you are paying less tax on them.

You can contribute to a TFSA as long as you are working. You can use it as retirement income whenever you like.

You want to leave a legacy.

RRSP allows you to nominate a beneficiary. You can transfer funds to them without having to pay a lot of tax.

TFSA withdrawals remain tax-free even after your demise. You can leave money to anybody you nominate on your TFSA account.

If you are unable to decide, you can benefit by starting both plans.

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