Seen the commercials yet? Read the ads online or in the papers yet? I’m sure you have…
The RRSP season is here and the financial institutions are making sure you don’t forget about it/them.
If you haven’t done so already, it’s time to contribute to your Registered Retirement Savings Plan (RRSP) before the 2012 tax year deadline expires on March 1, 2013.
The intentions of our financial institutions are good. They are encouraging us to save and invest. This is because the benefits of the RRSP are pretty substantial:
- Your contribution limit this year is the lower of 18% of your earned income or $22,970.
- If you did not use all your contribution room after 1991 including last year, you can carry forward the unused contribution room. Read more about that here.
- All contributions are tax deductible.
- Investments held in the account can grow tax deferred.
- The RRSP does not need to hold just GICs, bonds or mutual funds. You can hold ETFs and stocks if you own a self-directed RRSP.
- You can make “in-kind” contributions to your RRSP from other accounts.
What types of RRSPs can you have?
Let’s look at a few account options.
“The Account Just For You”
The most common type of RRSP is an individual plan. An individual RRSP is an account that’s only in your name and the tax benefits apply to you. Here are a few common types for folks to consider:
- GIC RRSPs – you invest for a specified term and you get some interest. These are offered by many banks, trust companies and credit unions. The interest rate usually isn’t much higher than the yield on a high interest savings account though.
- Mutual Fund RRSPs – these accounts are offered by many financial institutions; you invest in mutual funds but those funds are often subject to sales commissions and higher management fees than other investment products.
- Self-Directed RRSPs – my personal favourite since you can hold pretty much whatever you want (e.g., ETFs, stocks, bonds) with a discount investment broker. This account has the most flexibility. Check out a “back to basics” post about self-directed RRSPs from Million Dollar Journey here.
“The Account For Someone Special”
A spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the account, you don’t, but you can contribute to it. Because you make the contributions you get the tax deduction.
“The Account For The Masses”
A group RRSP is a collection of individual RRSPs offered by an employer. Using a group RRSP, contributions to the plan are usually deducted from your paycheck and employers may match or exceed your paycheck contributions. You can read more about these types of RRSPs and what investments you can hold within them here.
There is much more to RRSPs than what I wrote above and the contribution deadline for the 2012 tax year is approaching fast. With a little bit of homework, you can pick the right plan and make some great decisions for your financial future. So go beyond the marketing and learn more!