Have you contributed to your Registered Retirement Savings Plan (RRSP) for the 2023 taxation year? It's not too late to do so. The RRSP is a federally regulated program that allows you to accumulate funds for your retirement, while saving on taxes. Generally speaking, any income accumulated in the plan is tax-free for as long as the funds remain in the plan. What's more, you can deduct the amount of your RRSP contributions from your annual taxable income. For many, RRSPs represent an important source of retirement income. By investing in your retirement savings plan, you're investing in your future. You have until February 29, 2024 to do so.
Here's our RRSP guide for the 2023 taxation year.
-What is the maximum amount?
The contribution limit for the 2023 taxation year is $30,780 and $31,560 for 2024. However, the amount to which you are entitled cannot exceed 18% of your earned income (excluding pension and investment income) during the year. For example, if you earned $80,000 in 2022, your maximum contribution will be $14,400 for 2023. However, if you are a member of a workplace pension plan, your limit may be reduced by the pension adjustment. If you haven't contributed the maximum amount to your RRSP in recent years, chances are you have unused contribution room, so your maximum amount will be higher. To find out how much you can invest this year, you can either consult page 3 of your latest federal Notice of Assessment, access My Account on the Canada Revenue Agency (CRA) website, or call 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.
-Back to school
If you want to go back to school, there's a program called the Lifelong Learning Plan (LLP). Similar to the HBP, the LLP allows you to withdraw funds, tax-free, from your RRSPs to finance your training, education or that of your spouse. To benefit from the LLP, you or your spouse must be enrolled full-time in an eligible training program. The maximum you can withdraw is $10,000 per year, up to 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 have benefited from a salary increase, you may lose certain federal or provincial tax credits. For example, a $1,000 increase in your annual income could result in you losing almost the same amount in tax credits. It may therefore be to your advantage to invest this surplus in your RRSP in order to reduce your annual income and take advantage of these programs, or at least not lose them.
- 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.
