5 things you should know about RRSPs
Registered Retirement Savings Plans (RRSPs) were introduced several decades ago to promote savings for retirement as a tax-sheltered investment vehicle. You can open an RRSP as long as you have an earned income, have a social insurance number and have filed a tax return.
Sadly, many Canadians are still confused about RRSPs. I don’t blame them: there have been significant changes since Ottawa introduced the concept back in 1957. Here are five things you should know about RRSPs.
How much you can contribute to RRSPs
You can contribute 18% of your earned income from the previous tax year, or a maximum of $26,010 for 2017, whichever is less.
For the 2016 tax year, our RRSP limit was 18% of our 2015 gross income, or $25,370. Again, whichever is less.
For the 2015 tax year, RRSP maximum limit was $24930 or 18% of your earned income.
Every year, the RRSP maximum limit has been increasing. Got it?
Type of investments you can hold in an RRSP
Canadians believe RRSP is a tax-sheltered savings account where you can only hold cash. Wrong. You can build and manage your own investment portfolio by buying and selling a variety of different types of investments such as bonds, mutual funds, index funds or stocks. This is called a contribution “in kind.” CRA does a good job of explaining, for those interested in taking control of their RRSP assets and making the investment decision for themselves.
Borrow to buy a home
The Home Buyers’ Plan is one of the two programs where you can use to take out money from your RRSP without incurring tax. You can take out up to $25,000 out of your RRSP (per person) to put towards the down payment of your first home. The only caveat here is you will have to pay back the $25,000 to your RRSP over the next 15 years.
Borrow to go back to school
Akin to the Home Buyer’s Plan, any withdrawals from your RRSP for the purpose of education are tax free. This is called the Lifelong Learning Plan (LLP).
Use the government form RC96 when you want to withdraw funds for LLP from your RRSP. You can find the form here.
You can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in this program. Unfortunately, this plan can’t be used for your child’s education (well, you have got RESPs for your kids, don’t you?), but you may use it for your spouse’s education. Amounts withdrawn must be repaid in 10 years. Fair game.
Spousal RRSP
According to Canada Revenue Agency, contributions you make to a spousal or common-law partner RRSP reduce your RRSP deduction limit. All or a portion of your RRSP contribution can be made to an RRSP in your spouse’s name. As the contributor, you get the deduction, but your spouse is the owner of the plan.