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!
I am interested in learning more about a self directed RRSP. How do you set that type of an account up? Any tips would be helpful. If this is something you have already covered can you let me know the link. Anything would be great! Thanks
@My Own Advisor
I’m in such a low tax bracket I actually pay negative dividend tax. I checked that about 5 times before I believed it. :).
I don’t use a self-directed RRSP. My current RRSP is through RBC and managed a an advisor. I’ve been looking into getting a self directed through Quest Trade. Can you trade ETFs/Index Funds in a self directed RRSP through Quest?
Absolutely Eddie 🙂
I don’t see you as a trader though! More of a buy and hold and earn income from ETFs kinda guy, no?
Let me know if you have any other questions.
@My Own Advisor
I am a fan of TFSAs over RRSPs as well.
Two points about TFSAs that I’ve just been made aware of is the unrecoverable US foreign withholding tax and (pertinent to your dividend approach) they are less tax efficient for dividends for those in the lowest income bracket.
I’ve just starting learning about all this and there always seems to be an additional layer of complexity! Thanks for the blog.
No sweat none, re: the blog. I enjoy running it.
As for the TFSA, correct, U.S. dividends are not recovereable.
You’ll be hit with a 15% tax on US dividends held in the TFSA. This is why the RRSP makes sense for US dividend stocks.
Worse still, if the US dividends are received in a non-registered brokerage account, they will be taxed at your marginal rate because the dividend tax credit only applies to Canadian corporations. While you’ll be able to claim the withholding tax as a foreign tax credit, in a non-registered account, it will still cost you money.
Summary: U.S. dividends paid to RRSPs and RRIFs are exempt under the Canada-U.S. Tax Treaty. This treaty does not apply to TFSAs.
Taxation on dividends is very efficient for low income earners; if you only earn dividends and no other income; you almost pay zero tax thanks to the Canadian dividend tax credit. Of course, this only applies if you hold your Canadian stocks unregistered.
Let me know if you have more questions! 🙂
I cannot stand the concept of RRSP season. Saving for the future should be a year round job and not something that people think about for a few weeks each year.
RRSP season is misleading advertising and people need to learn that RRSPs are available all year round and you do not have a few week period in which to “buy” one.
It is an ongoing financial product not Cadbury Easter Cream eggs.
Great comment Jane.
RRSP is a season for some and should be a non-event for others. These accounts are not meant for everyone but that wasn’t the premise of my post. As long as you invest in this account, I simply wanted folks to know a few options.
You have nicely given them some other things to consider…that post is coming next week 🙂
I think a really good addition to this post would be to point out that a RSP is better thought of as a tax deferment account. There are many reasons to use ones (and many reasons not to) and they are not limited to retirement (although they can, and are, used quite successfully for retirement).
A few points to keep in mind:
1) If you are in the lowest tax bracket there is little to no benefit to using a RSP over a TFSA unless you want to save and immediately need the money.
2) You can withdraw money from am RSP during periods of low income to take advantage of your low tax bracket and put it back in when you enter a higher tax bracket.
3) If your spouse is in a higher tax bracket than you a spousal RSP makes a lot of sense; even consider removing money from your own RSP and give it to your spouse to put it in a spousal RSP for you. Note that you will lose your RSP room but you do get 18% per year so it may be worth it.
4) The REAL value of your RSP is it’s value minus taxes (say -30%). The tax man always gets you.
Thanks for the comment none.
You are correct, I left out some key principles about when an RRSP makes sense, but for this post, I assumed folks know they need it.
Regarding the taxes….you might already know I favour the TFSA for a retirement account vs. The RRSP…for a few of the reasons you noted and more. I’ve got some previous posts that explain this position but I hope to write another next week 🙂
Thanks for explaining the basics about RRSP’s here. I hope to look into the self-directed once I get all this house stuff sorted out as I’ve got plenty of room.
I would strongly recommend a self-directed RRSP, if you need it.
You have so many options with this account!