by Pam on December 5, 2010
Most Canadians are aware of the existence of Registered Retirement Savings Plans (RRSPs) but they really do not know much about how they actually work or how they can use them to benefit them fully. Until just a few years ago, I thought that once you turned age 65, you were allowed to take the money out of them. How little did I know! Unfortunately most Canadians are still in the dark about RRSPs and when it is wise to use them.
RRSPs can be especially useful for regular employees who pay a lot of tax on their employment income. By contributing to an RRSP, they are allowed to defer their income tax. They benefit from lower taxes payable now, and then will expect to pay it later when they withdraw it (presumably when they retire and are at a lower tax bracket).
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by Guest on November 27, 2010
With the economy still uncertain, some Canadians have turned to their Registered Retirement Savings Plan (RRSP) as a source of funds. But there could be tax consequences on your 2010 tax return.
- Lose your tax shelter: RRSPs are designed to help Canadians save for retirement and provide a tax shelter for the funds. You lose the sheltering benefits when you make a withdrawal.
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by Guest on November 25, 2010
- You can overcontribute to your RRSP by up to $2,000 without being penalized. However, you cannot claim a deduction for the excess amount.
- If you overcontribute by more than $2,000, you are subject to a one per cent penalty tax for each month you are in excess of that. You have to complete a T1-OVP Individual Tax Return for RRSP Excess Contributions to calculate the amount of the overcontribution and penalty tax. This form must be filed, and the tax remitted, within 90 days from the end of the year (March 30, 2011 if there was an excess amount in the plan at the end of a month in 2010.)
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by Guest on November 23, 2010
- Beat the deadline: The deadline for making a contribution to a Registered Retirement Savings Plan (RRSP) that can be deducted on your 2010 tax return is March 1, 2011.
- Know your limit: The maximum annual dollar limit for RRSP contributions in 2010 is $22,000.
- Over the limit rules: Contributions up to $2,000 in excess of RRSP limits can be made without being subject to a penalty tax.
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by Pam on September 2, 2010
As I have written before, it is important for all of us to have some funds set aside in case of emergency. If your vehicle breaks down or you find yourself out of work for a while, you do not want to have to use your retirement savings. There are key reasons why you should not even consider your RRSP as your emergency funds.
First, you get penalized for withdrawing. You pay withholding tax to the government when you first make your withdrawal.
Second, you have to pay more tax at the end of the year on the amount you withdraw, depending upon your income tax bracket.
Third, there are other negative impacts as well, including the fact that you lose that RRSP contribution room permanently. So as you can see withdrawing from your RRSP is expensive.
To prevent ever having to make an RRSP withdrawal before retirement, consider putting some money aside every payday and using either a Tax Free Savings Account or even just a regular savings account that still pays you some interest. This way you have the flexibility to make RRSP contributions with excess savings before the deadline without putting you in the position of touching your RRSP prematurely. (Build your emergency funds until you have three to six months of living expenses and then any money above that can be used for your RRSP in the event that nothing comes up throughout the year.)
Before putting money into your RRSP, make a mental note that this money no longer exists to you until you retire. It is not back up savings. Don’t even include your RRSP balance when you calculate how much money you have. It’s best if you forget about it, because there is no point in contributing to your RRSP if you intend to use it as emergency funds. It just doesn’t make financial sense.
by Pam on February 25, 2010
Withdrawing from an RRSP can be an extremely expensive option due to the tax consequences. So, unless you are saving for retirement within your RRSP, or you are planning on taking advantage of the Lifelong Learning Plan or the First Time Home Buyer’s Plan, I would not recommend saving within an RRSP investment vehicle.
To illustrate this, suppose you are 25 years old and you have managed to save $5000 in your RRSP. You end up spending too much money over Christmas and find it impossible to keep up with all your bills. You decide to withdraw $2000 from your RRSP.
By doing so, you have lost $2000 worth of RRSP contribution room. You can never get this contribution room back.
As well, you will be subject to a withholding tax of 10% in all provinces (except Quebec where you would have to pay 21%) that would be taken off the top and sent to the government. So, even though you are withdrawing $2000, you would only get $1800 at the end of the day or even less in Quebec.
You will also need to add the full $2000 to your income for the current tax year, and then depending on your income tax bracket, you will likely have to pay more tax at the end of the year unless you deliberately make an RRSP contribution to offset the withdrawal.
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by Pam on February 9, 2010
With the introduction of the Tax Free Savings Account (TFSA) in January 2009, Canadians now have another investment vehicle option to save for retirement. Whereas before, most people took advantage of the immediate tax deduction for contributing into a Registered Retirement Savings Plan (RRSP), now they have to consider what will be most beneficial to them in the long run. With the RRSP contribution deadline for 2009 fast approaching, it’s important for Canadians to make this decision ASAP.
What are the advantages of contributing to a TFSA?
Although you don’t receive an income tax deduction for contributing into a TFSA, there are some important advantages to consider. All earnings within a TFSA are not taxable, whereas with an RRSP, earnings are tax deferred, but when funds are withdrawn, they are fully taxable.
A second advantage is that there are no expensive tax implications when you withdraw from a TFSA. Since you’ve already paid tax on the money you contribute to a TFSA, when you withdraw the funds it is not a taxable event. By contrast, if you withdraw from an RRSP, not only are you subject to an immediate withholding tax, you also have to add the amount withdrawn to your income for the year and you may end up paying more tax when it is time to fill out your tax forms or prepare your online taxes this year.
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