A Registered Retirement Savings Plan (RRSP) is a tax-deferred savings account that can help Canadians save for retirement. RRSPs come with many fantastic benefits, and the different types of RRSPs can give you options for how you can save for retirement. If you didn’t take full advantage of your RRSP in 2019, the good news is that you still have time. The RRSP season lasts beyond the calendar year, so as long as you make contributions prior to the deadline, you can still reap all the benefits of an RRSP for the 2019 tax year.
Benefits of an RRSP
If you haven’t yet used up your contribution room for 2019, there are several reasons why you should consider doing so:
One of the biggest benefits of an RRSP is tax advantages. Both contributions and earnings are tax-deferred, and contributions are tax-deductible. One of the reasons tax-deferred accounts are especially appealing is because many people have a lower marginal tax rate (MTR) in retirement, which is when you’ll make the withdrawals.
One of the major benefits of an RRSP is the flexibility that it offers compared to some other retirement savings options. RRSPs were created to save for retirement, but your funds can also be used to help pay for your first home or cover the costs of your children or grandchildren’s higher education.
RRSPs also offer more flexibility in their investment options, such as mutual funds, bonds, ETFs, cash, and Guaranteed Investment Certificates (GICs). You can also invest in stocks, including individual stocks. This option is not available in all retirement savings accounts.
Types of RRSPs
There are four types of RRSPs. Though all four are fairly similar, there are a few noteworthy differences to be aware of.
This is the most straightforward. With a regular RRSP, individuals make contributions to an account in their name. The account is managed by a financial institution or an investment company.
The goal of a spousal RRSP is to help equalize the incomes you and your spouse receive in retirement. The higher income earner is normally the contributing spouse. The goal is to transfer the assets to the lower-income earner. This can lead to paying less in income taxes since withdrawals will likely be taxed at a lower marginal tax rate. These accounts are usually ideal for spouses with a large gap in their incomes. Though you can only contribute to your RRSP until the year you turn 71, if your spouse is younger, you can continue contributing to their RRSP until the year they turn 71.
As the name implies, these accounts are individual RRSPs grouped together. They are usually sponsored by an organization such as an employer, union, or professional association. Typically, the employer and employee contribute to the same group RRSP. Some employers also offer employee matching up to a certain percentage of the employee’s income or a set limit.
This is an RRSP that you manage yourself. While a self-directed RRSP gives you the opportunity to build and manage your own account, they’re not ideal for everyone. Only those who have the time and knowledge to manage their own portfolio should even consider having a self-directed RRSP. If not, consider reaching out to a financial professional. They can help you manage your RRSP and save for your retirement.
Contribution room is the term used to describe how much you can contribute to your RRSP. Your contribution room is 18% of your earned income from the previous year, up to the maximum limit. Earned income doesn’t include passive income, such as interest, dividends, or capital gains. The 2019 RRSP maximum contribution limit is $26,500 and the 2020 maximum contribution limit is $27,230. If you’ve reached your 2019 contribution room and have a spouse, you can also look into making contributions to their RRSP.
The good news for those who have not yet used up their 2019 contribution room is you have about 60 days after the end of the calendar year to catch up on contributions to your RRSP for the previous year. This year, the RRSP season goes from January 1, 2019, to February 29, 2020, but since the 29th of February is a Saturday, you have until the next business day (March 2nd, 2020). This means you can make RRSP contributions from January 1, 2020, to March 2, 2020, and still have them count as part of the 2019 tax year. This allows you to claim a deduction from the contributions on your 2019 taxes. The only exception to the contribution deadline is for those who turned 71 in 2019. December 31st of the year you turn 71 is the last day you can contribute to your RRSP.
Why You Should Use Up Contribution Room
If you’re making contributions to an RRSP, you may think it doesn’t matter which year they’re for. While making contributions in any year is better than not making contributions at all, there are plenty of reasons why it may benefit you more to use up your contribution room from the previous year. Since contributions are tax-deductible, you could get a larger tax refund this year. You’ll also lower your taxable income, which increases your eligibility for income-tested government benefits, such as Canada Child Benefits (CCB) and the GST/HST credit. Finally, you can increase your total retirement savings if you contribute your maximum amount every year.
The 2019 RRSP season is coming to a close. If you haven’t yet used up your contribution room, you have until March 2, 2020 to do so. For further questions about the RRSP season and how RRSPs fit into your financial plan, contact us today!