RRSPs are a retirement savings vehicle created by the Canadian government. By making regular contributions into a tax-sheltered retirement portfolio (often a managed segregated fund) for 30-40 years, you can enjoy the benefits of compound growth.
Regulations
Eligibility
- You must be under the age of 71.
- You file your income taxes with the Government of Canada
- Contribution room: Lesser of 18% of your annual earned income and $22,970 (2012).
Example: If you make $45,000 this tax year, you may contribute the lesser of $22,000 and ($45,000*18%). Because the latter amounts to $8,100, this is the maximum amount you can contribute in this tax year.
Carry-forward
If you do not contribute your maximum amount this year, this amount can be carried forward to next year and added to your current year contribution limit.
Withdrawals
One of the greatest benefits of the RRSP is that all funds placed into the plan can be deducted from taxable income. Once funds are withdrawn from the plan, however, they are subject to a withholding tax. The tax amount will be held back by the RRSP administrator and remitted on your behalf to the government.
Over contributing
There is a lifetime allowance for over-contributions of $2,000. Taxes may be placed on over-contributions above this amount.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time home buyers to withdraw up to $25,000 from their RRSPs in order to build or buy a home. Contributions must remain in the RRSP for at least 90 days prior to withdrawal and funds must be repaid into the RRSP within 15 years.
You may participate if:
- You have a written agreement to buy or build a qualifying home.
- The home must be a principal place of residence within one year of buying/building it.
- You must be a first-time home buyer. (i.e. not owned a home for the past 5 years, spouse included.)
- Your HBP balance is zero in the year of withdrawal.
Lifelong Learning Plan (LLP)
The Lifelong Learning Plan allows you to make withdrawals from your RRSP in order to pay for your education or training.
You may participate if:
- You own an RRSP.
- You are enrolled in school full-time.
- You are a resident of Canada.
- Your program is considered a qualifying program at a designated educational institution.
- Participation must be done by the end of the year in which you turn 71 years old.
Participants must make repayments into their RRSPs within 10 years. Repayments are made interest-free. Individuals may take part in the LLP even if they are in the process of repaying funds under the HBP.