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Registered retirement savings plan

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"RSP" redirects here. For other uses, see RSP (disambiguation).

A Registered Retirement Savings Plan or RRSP is an investment account that provides some tax benefits for saving for retirement in Canada. RRSP refers to a provision in the Income Tax Act that allows a person to shelter financial property from taxes.

Examples of financial property that can be used with an RRSP are: mutual funds, shares in a company(stocks), bonds, mortgages and GIC's.

Some Terms

Contributor
The purchaser of the RRSP
Annuitant
Generally, the person for whom the plan provides income. Usually but not necessarily the contributor. See Spousal RRSP
Deduction Limit
The maximum amount of RRSPs that can be claimed on a tax return.
Home Buyer's Plan
A program to allow "First-Time Homeowners" to borrow from their RRSP to buy a home.
Life-Long Learning Plan
A program to allow individuals to borrow from their RRSP to go or return to post-secondary school.

Calculating RRSP Deduction Limit

A deduction limit is generally calculated as 18% of a person's earned income from the previous tax year, minus any "pension adjustment", up to a dollar maximum. This dollar maximum has been rising, for 2004 the maximum is $14,500, for 2005 it is $15,500, and from 2006 on it will be $18,000. After that, it is supposed to be subject to inflation. Any RRSP deductions not taken in a tax year are carried forward indefinitely to future tax years. So, for example, if a person's RRSP deduction limit were $8,000 and he only contributed $3,000, the unused $5,000 deduction would carry forward, plus it would be increased by the deduction limit as calculated by the formula above.

After filing a tax return (or any adjustments to the tax return,) each tax payer receives a Notice of (Re)Assessment from the Canada Revenue Agency, indicating their new RRSP deduction limit.

Limits on purchase

RRSPs can be purchased until the annuitant is aged 70.

While it is possible to purchase more than the contributor's deduction limit, it is generally not advised as the excess amount (presently $2,000 over the deduction limit) is subject to a significant penalty tax removing all benefits.

RRSPs purchased within the first 60 days of the calendar year may be used for the previous tax years. All other purchases may be used in the same calendar year or held for future use.

There was a limit of 30% on the "foreign content" of RRSP investments, meaning that at least 70% of the portfolio had to be invested in Canadian securities. However, in the proposed federal 2005 budget, the foreign content restrictions have been eliminated. As of this writing, the 2005 budget has not been passed, so individuals are cautioned against making foreign investments before the changes become official.

Spousal RRSP

A Spousal RRSP allows a higher earner to contribute to an RRSP in the spouse's name. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.

After 70 Years

When the annuitant turns 71, the RRSP must be cashed out. Generally, the financial property would be transferred to a Registered Retirement Income Fund or RRIF which has a slightly different tax treatment. It is expected that at that time, an individual's income will be lower and therefore subjected to less tax.

Self-Directed RRSP

Many RRSP's are simply registered mutual funds. A "self-directed" RRSP is essentially a trading account at a brokerage which has tax-sheltered status. The holder of a self-directed RRSP instructs the brokerage to buy and sell securities on their behalf as with any brokerage account.

See Also

A Labour Sponsored Investment Fund is a similar tax shelter which complements an RRSP by allowing an increase in the foreign content held.

Caution

The above is not intended to replace tax or investment advice. It presents an overview of the topic only. See Canada Revenue Agency's web pages on RRSP or a Tax Preparer for more information if preparing a tax return. See an Investment Advisor for information on risks of investing.

External Resources

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