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RRSPs - An Overview

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investment program available to working Canadians. Money that is placed into an RRSP can accumulate tax-free until the time it is withdrawn.

To make an RRSP contribution, you have to have had “earned income” from employment, your business, or from the rental of physical property. Income like interest on investments, stock dividends, and pensions does not qualify.

The amount you can contribute to your RRSP depends on how much earned income you make in a year. The annual maximum RRSP contribution limit is set by the Canada Revenue Agency (CRA) and your participation in other pensions, like CPP, or that are offered through your employer.

The good news is that unused contribution room from previous years is also included in your current RRSP limit. However, you need to be careful in calculating your limit as exceeding it with “overcontributions” into an RRSP can draw harsh CRA penalties.

CRA rules allow you to borrow from your RRSP tax-free in certain circumstances. These include: buying your first home, funding you or your spouse’s training or education.  Most other withdrawals from your RRSP are subject to income tax, including withholding tax at the time of withdrawal.

To access your funds in retirement, you convert your RRSP into a Registered Retirement Income Fund (RRIF) from which you can draw income, generally at a lower income tax rate than you would have paid when you were working.

The Benefits of RRSP Contributions

An RRSP can help provide you with extra tax refund cash now, allow you to save more money to retire with, and reduce your income taxes when you do retire.

RRSP contributions made within your allowable CRA limits are deductible for income tax purposes for the year that you claim them on your tax return.

Making an RRSP contribution may entitle you to a refund of a portion of the income tax deducted from your payroll or remitted by you for your business or rental property dealings during the past year.

One way to leverage your income tax refund is to contribute some or all of it towards your next year’s RRSP limit. Another is to use it to pay down debt. That could include “good debt” like a low-cost UCU RRSP loan that you can take out if you don’t have the cash you need to contribute to your UCU RRSP. 

There is no tax applied to interest earned within an RRSP until such time as it is withdrawn, typically in retirement. This way, the investment grows tax-free within the RRSP for further reinvestment and continued growth. This means that a UCU RRSP gives you the opportunity to grow your retirement nest egg bigger, faster.

Because the government set up RRSP tax-breaks to help contributors achieve better retirement income, CRA rules require that your RRSP must be collapsed by the end of the calendar year that you turn 71.

Even though these withdrawals will be subject to applicable income tax, because you are retired and presumably making significantly less income than in your working years, your earnings will fall into a lower tax bracket. This means that you will pay a lower rate of tax in retirement on the withdrawals than you would have paid on your earnings when you were working.

If you have a spouse whose income and therefore tax rate will be lower than yours in retirement, you may be able to further save on tax by using your RRSP limits to make a contribution to your spouse’s RRSP. With a spousal RRSP contribution, you receive a tax deduction, your spouse benefits from the tax-free accrual of interest in the RRSP, and both of you benefit from a combined lower income tax burden in retirement.

Provided CRA criteria are met and the funds are paid back within a prescribed time, you can temporarily borrow money from your RRSP without incurring income tax for the first-time purchase of a home under the Home Buyers Plan, or use in a Lifelong Learning Plan to fund retraining or education for you or your spouse.  

If you withdraw money from your RRSP for any other purpose (other than the tax-free conversion of your RRSP to a RRIF), the amount withdrawn is included in your income for that year and subject to income tax.  Such withdrawals from an RRSP are also subject to a 10% to 30% withholding tax at source.  

The exception to paying income tax on a RRSP withdrawal is if you have low or no income and would not be liable to paying any income tax. 

For more information on the Home Buyers Plan, visit https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html.

For more information on the Lifelong Learning plan, visit https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4112/lifelong-learning-plan.html

Contribution Limits

The maximum contribution you can make into an RRSP depends on limits prescribed by the CRA, and on your particular income and pension circumstances.

For 2021, the maximum RRSP contribution limit is 18% of earned income, up to a maximum of $27,830. The maximum is available to individuals with 2021 earned income of at least $154,611. For earnings under this amount, the contribution limit is reduced proportionately.

You may be able to contribute more than your annual limit in the event that you did not take advantage of the full RRSP amount available to you in previous years.

On the other hand, if you participate in a registered pension at work with its tax sheltering benefits, the amount you can contribute to your RRSP will, in all likelihood, be reduced. This is done to maintain fairness between the tax sheltering available to individuals who do, and do not, have access to a company pension plan.

The maximum RRSP contribution limit for the 2022 tax year will increase to $29,210. Provided your tax returns are up to date, a good starting point to determine your RRSP limit is to check the RRSP Deduction Limit Statement on your Notice of Assessment issued to you after you filed your last tax return.

For more details on how contribution limits are calculated, please see  https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/contributions-affect-your-rrsp-prpp-deduction-limit.html.

Penalties for Exceeding your RRSP Limit

It is important to be very careful in calculating your limit so as not to unknowingly “overcontribute” to your RRSP as CRA penalties for doing so can be quite harsh. The CRA does permit a one-time over contribution subject to certain criteria which you can learn more about from speaking with one of our investment specialists.

For more details, please see
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/contributing-a-rrsp-prpp/what-happens-you-over-your-rrsp-prpp-deduction-limit.html.

Talk to a Financial Expert today.

Our financial experts will answer any of your RRSP or investment questions. To speak with a UCU Advisor, call 1-800-461-0777 or submit the following form. Get started today!

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2022 RRSP Deadline

The deadline for making RRSP contributions count as a tax deduction on your 2021 tax return is Tuesday, March 1, 2022.

The UCU Unlimited 100% Deposit Guarantee

RRSP’s with UCU are 100% deposit insured through the Financial Services Regulatory Authority (FSRA), no matter the amount.

*Rates are subject to change, without notice, at the sole discretion of Ukrainian Credit Union. 0.25% bonus on top of 3, 4, 5 year terms.