Hello to all,
Have you contributed to your Registered Retirement Savings Plan (RRSP) for the 2022 tax year? It is not too late to do so. The RRSP is a program governed by the federal government allowing you to raise funds for retirement exempt from tax while saving on your taxes. In general, any income accumulated in the plan is tax-free during the period when the funds remain in the plan. In addition, you can deduct the amount of your RRSP contributions from your annual taxable income. For many people, the RRSP is an important source of retirement income. By investing in your retirement savings, you invest in your future. You have until March 1, 2023, to do so.
Here is our RRSP guide for the year 2023.
- What is the maximum amount?
The contribution limits for the tax year 2022 is $29,210 and $30,780 for 2023. However, the amount which you are entitled may not exceed 18% of your earned income (excluding pension and investment income) during the year. For example, if you earned $80,000 in 2021, your maximum contribution amount will be $14,400 in 2022. However, if you are a member of a pension plan at work, your limit could be reduced by your pension adjustment. If you have not paid the maximum amount in your RRSP in recent years, you may have unused contribution room that you will be able to use, which could increase your maximum amount. To find out how much you can invest this year, you can consult your last Notice of Assessment that you received from the Canada Revenue Agency (CRA). You can also consult your access to My Account on the CRA site or call the CRA directly.
- A deduction on your income tax return
One advantage of the RRSP is that it allows you to grow your money tax-free. Also, it is possible for you to deduct the amount you contribute from your total income, thus reducing your taxable income. The funds invested in an RRSP are taxable on redemption. Therefore, it is recommended to withdraw your money from your RRSP during your retirement while your tax rate is generally low.
- Planning to buy your first home
If you plan to purchase your first home, your RRSPs can be a considerable advantage. The Home Buyers' Plan (HBP) is a program that allows you to withdraw funds from your RRSPs to buy your first house. The maximum withdrawal that can be made from the RRSP under the HBP is $35,000. To qualify, you must be regarded as the buyer of your first home and become the owner of the main house before October 1st of the year following your withdrawal.
- A return to school
If you want to return to school, there is a program called incentive arrangements for Lifelong Learning Plan (LLP). Like the HBP, it allows you to withdraw funds from your RRSP without taxation to finance education expenses for you or your spouse. To qualify for the LLP, you or your spouse must be enrolled full-time in a qualifying educational program. The maximum you are allowed to withdraw is $10,000 per year with a total limit of $20,000.
- RRSP VS TFSA
Since the introduction of the TFSA in 2009, many people have asked themselves the following question: should I invest in an RRSP or a TFSA? Several factors can be considered, a rigorous analysis is required before making a contribution to one or the other. Here are some general points that could help you make an informed decision.
From a strict tax perspective, if the marginal tax rate on retirement (or on withdrawals) is lower than the marginal tax rate at the time of the contribution, you must opt for the RRSP. Otherwise, it is more beneficial to favour the TFSA. In the theoretical case where the rates are equal, the two regimes are equivalent. The reality is more complex than that. It can be particularly difficult to predict when and especially at what marginal tax rate a contribution will be withdrawn. In addition, a contribution to the RRSP, thereby reducing family net income, can allow a household to become eligible for certain tax credits. This is a significant aspect.
It is also necessary to settle on the possible use of the sums invested. If you plan to use these amounts for various short or medium-term projects, it is better to favour the TFSA. Not only would there be no tax impact upon withdrawal, but the amount of the withdrawals also create new contribution room the following year in the TFSA when they are lost at the RRSP level. However, if the funds are intended for retirement, it would be appropriate to opt for an RRSP, particularly in cases where the marginal tax rate during working years exceeds the retirement rate.
If in doubt, it is recommended that you consult a financial advisor. Our financial planning specialists can help you determine which TFSA or RRSP is the right choice for your financial situation.
- Reduce your annual income to benefit from various tax credits
If you get a raise, it is possible that you have changed tax brackets, and you could lose some tax credits. For example, a $1,000 increase in your annual income could make you lose your tax credit on your child tax benefit. It may therefore be advantageous for you to invest this surplus in your RRSP to reduce your annual income and take advantage of these programs and recover a larger sum.
- RRSP in the name of a spouse
An RRSP can be an income splitting tool. Indeed, an RRSP in the name of your spouse allows you to split your retirement income. By contributing a portion of your allowable contributions in your spouse’s RRSP, you will decrease your income tax and your spouse will be taxed upon withdrawal at retirement. It is worth mentioning that the amounts contributed belong to the spouse, but if there is a withdrawal within three years following the contribution, it is you who is going to be taxed on the withdrawal. Only new contributions will be accepted making it impossible to transfer funds from your individual RRSP to a spousal RRSP. This is a very useful strategy for minimizing income tax at retirement. It is very important to note that the amount you pay into your spouse’s RRSP cannot exceed your own contribution limit. It is possible to contribute to your spouse’s RRSP until 71 years old.
- Borrowing to Contribute
It is possible for an individual to borrow to invest in an RRSP, which is called a leveraging strategy. This option must be evaluated carefully since everyone's financial profile is different. It is often more advantageous to save and eventually invest in an RRSP than to borrow. In addition, the interest on the loan is not deductible.
- After 71 years
What happens to your RRSP after you turn 71? At this time of your life, you will need to convert the amounts invested in your RRSP before December 31st of the year in which you celebrate your 71 birthdays, into a Registered Retirement Income Fund (RRIF). You can also purchase an annuity or take the cash refund. Otherwise, the value of the RRSP property must be included in your income.
Do not hesitate to contact us if you have any questions, our specialists can help you.
