With “RRSP season” in full swing I thought I would remind you why the RRSP is a powerful savings vehicle, why you might want to take advantage of it, and share what our longer term game plan for this account is.
The maximum RRSP contribution limit for 2014 is $24,270 (comparing to the last year, 2013, $450 of RRSP limit has been increased for the year 2014). However, if you did not use all of your RRSP contribution limit for the years 1991-2013, you can carry forward the unused amount to 2014. So, your RRSP contribution limit for 2014 may be more than $24,270.
The RRSP contribution deadline for the 2014 tax year is…drumroll please….March 02, 2015.
- A Registered Retirement Savings Plan (RRSP) is a savings and investment account that has special tax advantages.
- Inside an RRSP you can hold a variety of investments including Guaranteed Investment Certificates (GICs), mutual funds, Exchange Traded Funds (ETFs), bonds and other securities.
- An RRSP is an account, not a mutual fund or an investment itself.
- Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
- There are contribution limits for an RRSP account.
- Contribution limits are based on the contributor’s earned income and can be found on his/her tax notice of assessment.
- There are penalties if you over-contribute to your RRSP although a small exemption exists.
- Unused RRSP contribution room can be carried forward, for future tax deductions in future tax years.
- After you select investments for the account, the income you earn on those investments inside the RRSP are tax exempt, as long as money stays in the account.
- A common type of RRSP is an individual RRSP, registered in the name of the person contributing to it. There are also spousal RRSPs and group RRSPs.
- RRSPs can be managed by a professional money manager but you can do-it-yourself (self-directed).
Why the RRSP makes sense
As referenced above, there are two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction from your contribution, and
- tax-deferred growth.
With your tax deduction, you can reduce the taxes you pay today.
With tax-deferred growth, investments in your RRSP can compound over time without being taxed as long as money made stays in the account.
For most Canadians, to reap the benefits of this tax-deferred account they should maximize their contributions where it makes sense (based on their earned income) and keep the fees associated with their investments inside the account as low as possible for as long as possible. RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years. This is because you’re not as rich as you think: when you take money out of the account, you have to pay the tax on the money withdrawn.
Our RRSP Game Plan
Every month we make preauthorized contributions to our RRSP accounts and every quarter, as money builds up, we make more investment purchases. So for us there really is no “RRSP season”. Right now we hold a mix of Canadian and U.S. ETFs inside our accounts along with a few U.S. dividend paying stocks. We reinvest all distributions and dividends paid every quarter from these investments so in effect, tax-deferred money is making more tax-deferred money.
Our goal is to eventually use withdrawals from these accounts each year (up to $5,000?, not sure yet) to help to pay for our retirement expenses but those withdrawals are at least 10 years away. We simply need to keep contributing to our accounts and focus on that.
Along with debt payments building assets inside an RRSP is an important component to secure the financial future of most Canadians. With the RRSP contribution deadline for 2014 tax year closing in soon consider taking some time to learn more about this account and how it can help you. The account and the assets you put inside it can be a very powerful savings vehicle, one that your future self will thank you for.
Do you use the RRSP contribution room available to you?