Right now, many Canadians are preparing for tax season. If you are hoping to get a refund this year on your taxes, you might consider contributing to a registered retirement savings plan. An RRSP, as it is more commonly known, offers a number of unique benefits that can help you save more for your future and reduce your annual tax payments.
How does it work?
An individual RRSP is a type of personal savings plan. Individuals—as well as their spouses or common-law partners—can contribute to these plans up to an annual limit using a mix of investments, including stocks and mutual funds.
There are a number of qualifications you must meet in order to open an individual RRSP. Simply put, if you have earned income and file an income tax return in Canada, you can contribute to an RRSP until December 31 of the year you turn 71. You must also have contribution room available, which will be stated on your annual Notice of Assessment sent by the Canada Revenue Agency.
What’s more, individual RRSPs have two tax benefits that help you save for your retirement:
1. Tax-sheltered growth—Investment income in your RRSP isn’t taxed while within the plan. In most cases, investors won’t have to pay any tax until funds are withdrawn. Because you may be in a lower tax bracket once you’re ready for retirement, your total savings can be significant.
2. Tax deductions—As mentioned above, individual RRSPs can also be used to reduce your tax, as contributions are deductible within specified limits.
Additionally, they can also be used for other types of savings. You can withdraw funds from an individual RRSP without being penalized, provided the money is repaid by a specified time. This can be particularly useful for large purchases, like buying your first home or paying for your education.
In addition to individual RRSPs, which can be opened through banks or other financial institutions, one of the most common group financial plans are group registered retirement savings plans (RRSPs). These are employer-sponsored retirement savings plans that allow employees to grow their investments tax-free.
These plans are similar to individual RRSPs but are instead managed on a group basis by an employer. Specifically, group RRSPs are looked after by insurance companies, mutual funds or banks—employers and employees simply cover any plan management fees.
Under group RRSPs, contributions are made on a pre-tax basis via direct payroll deductions. As an employee, you can choose whether or not to enrol in a group RRSP and how much you would like to contribute. Often, employee contributions are matched.
Employees will receive an eligible tax deduction for the amount contributed. However, employer contributions are tax-deductible and seen as a taxable benefit.
Other benefits of group RRSPs include:
• Low administrative costs compared to other investment options such as traditional pension plans
• Low minimum deposits, giving you access to investments you otherwise might not be able to acquire
• They are not subject to provincial pension regulations, which provides built-in contribution flexibility
• Contributions are employee-owned, meaning you can do whatever you want with the investment even if you leave your company
The RRSP contribution deadline for 2020 is March 2, so if you are interested in making a step towards saving for your retirement, there’s no better time to start than today. Contact our Wealth Management team to learn more.