Many Canadians may have challenges saving money for retirement due to the different situations and issues that can come up in their daily lives. Fortunately, there are systems in place to help taxpayers accumulate savings and encourage smart investments. One of these includes the Registered Retirement Savings Plan (RRSP).

What is an RRSP?

A Register Retirement Saving Plan, also known as RRSP, is a retirement investment plan system set up by the Canada Revenue Agency in 1957 that allows individuals to accumulate savings for retirement on a tax-sheltered basis. This includes investments such as stocks, bonds, mutual funds, etc.

RRSP is a type of account that is specifically set up to provide favorable tax treatment for people who use the account to invest money. This motivates individuals to save money for retirement and provides greater capital available for investment by deferring the tax on the income earned in the account.

Contributions to your RRSP are deductible from your income tax return. This reduces your taxable income and, thus, your tax liability. However, there are a few treatments that you need to be aware of.  Any investment income earned in the RRSP is tax-exempt while the funds remain in the plan. Once an individual withdraws funds from their RRSP, they will pay tax at their marginal tax rate. This allows for tax deferral, usually until a person retires, and the ability to make contributions and get deductions to take advantage of varying marginal tax rates depending on your stage in life.

2022 maximum RRSP contribution limit: $29,210

The 2022 RRSP contribution limit is $29,210. If you did not utilize your full RRSP contribution limit from prior years, you can carry forward the unutilized amount to 2022.  Therefore your RRSP contribution limit for 2022 may be higher than the maximum of $29,210.

Benefits of RRSP

RRSP is a great tool for allowing people to build up savings for retirement easily. Here are some notable benefits of having an RRSP:

Tax-Deductible Contributions

One benefit of contributions made to your RRSP is that you can claim your contributions as a deduction from your taxable income in the year. The higher your marginal tax bracket, the more tax savings you can gain. Assuming you are in a lower tax bracket, you can make contributions but delay the tax deductions to future years when your income is in a higher bracket. In Ontario, this may result in approximate tax savings of up to 53% of any contributions made to your RRSP.

Tax-Free Growth

Once funds are in your RRSP account and used to earn investment income, you do not pay any tax on your investment earnings as long as they are kept in your RRSP account. This means that your savings will be compounded tax-free, allowing your money to grow faster since more is available for reinvestment.

RRSP Transfer Tax Rates

You can transfer your RRSP savings tax-free into an annuity or a registered retirement income fund (RRIF) once you retire. This allows for easy access to your savings through predictable annual payments while potentially paying lower taxes on that income, assuming you are in a lower tax bracket at the time of retirement.

Tax Burden Reduction on Spousal RRSP

It’s possible to further accumulate tax-free savings by having a spousal RRSP set up. This would allow you to contribute to your spouse’s RRSP.   Assuming you are in a higher marginal tax rate than your spouse, this can be a smart strategy to get your contribution deducted at a higher rate, and when your spouse eventually withdraws the income, to be taxed at a lower marginal rate. Many CPAs know how to help you achieve this reduction and if you’re thinking about doing it yourself, make sure to read up on the conditions! It is always a good idea to consult a tax advisor as they can help reduce your tax liability.

Tax-Free RRSP Partial Home Down Payment

Using the Home Buyer’s Plan (HBP), you can generally withdraw up to $35,000 out of your RRSP as a downpayment for a qualifying home purchase, your first home. Any amounts withdrawn would have to be repaid into the account over a 15-year period. This program allows taxpayers to use their RRSP accounts and their related benefits to save up for their first home faster.

A similar program is available under the Lifelong Learning Plan (LLP) to allow taxpayers to withdraw funds from their RRSP for eligible post-secondary education programs.  The (LLP) allows you to withdraw up to $10,000 in a calendar year from your (RRSPs) to finance full-time training or education for you, your spouse, or your common-law partner. Many accountants in Toronto can do this for you.

Hiring Chartered Professional Accountants to Sort Your Taxes Out

Tax season is always a stressful time of year. No one likes spending hours sitting at the computer, struggling to fill out those tax forms and ensuring they’re including every possible deduction (and not forgetting any important documents)! If you find the tax season daunting, it might be time to consider hiring accountants.

They Help You Get Deductions

The first reason you should consider hiring a CPA is that they can help you ensure that you’re taking all of the deductions you can. CPAs have a lot of experience with tax regulations and know exactly which are available to you, ensuring you aren’t missing out on any savings.

Chartered Professional Accountants Know When Audits Happen

Another great reason to hire a CPA is that they’ll be able to help you if there’s ever an audit. Having a professional on your side can be great for peace of mind, knowing that you have someone who works with the CRA always helping you out if there are any problems. Plus, CPAs know precisely what they’re doing and are very familiar with Canadian tax laws.

They Make Sure Your Paperwork Is In Order

Finally, hiring a CPA can also help keep fees low and ensure everything is filed correctly. A CPA can help you with any forms you need to complete, sorting your taxes and ensuring that everything is correct. This will, in turn, help you avoid paying excess fees or being audited because of an incorrect form! As you can see, CPAs can make tax season so much easier and stress-free.

Frequently Asked Questions

What is the RRSP deadline?

The RRSP contribution deadline for the  2022 tax year is  March 1, 2023. Therefore, your 2022 RRSP contributions must be made before the RRSP contribution deadline to be eligible for a deduction on your 2022 taxes (due April 2023).

What happens if you miss the RRSP deadline?

Last day for RRSP contribution 2022 is March 1, 2023. If you miss an RRSP deadline, you will lose out on a tax break and possibly lose out on some of your money growing tax-free during the time you missed. However, there are options in case you do miss a deadline.

Can I contribute to RRSP after the deadline?

No, you have approximately 60 days after December 31 to make your RRSP contributions for 2022.

Can I claim RRSP contributions in future years?

It is indeed possible to claim your RRSP contribution in future years. As long as the contributions are not claimed as a deduction, the unused amount of contribution room is still available. You can claim these deductions in future years. This is ideally done when you expect your taxable income in the future to be higher. You will still be able to benefit from the tax-free growth of your investment income in your RRSP despite when you actually claim the contribution deduction.

Why is my RRSP limit low?

The amount of RRSP you can contribute each year is created using your contribution limit for the current year, including any previous unused contribution room found from previous years. Your current year contribution limit is subject to many factors, including how much you earned in the prior year, a maximum set by the CRA, or any reductions due to a company pension you may have available.