The RRSP deadline for the 2022 tax incentive is March 1.
But, what does that mean? For starters, RRSP stands for a Registered Retirement Savings Plan.
It’s a type of investment account that allows you to reduce your taxable income each year, while building up savings for future retirement income.
To help you answer more questions about them, we’ve put together a list to give you some insight.
Why should you contribute to an RRSP?
It might be hard to think about planning your finances for retirement.
There are many ways you can contribute to your financial future, and RRSPs are amongst the most common.
So what are the benefits?
They are registered with the Canadian Revenue Agency (CRA) which means they offer a tax incentive (Source: Enriched Academy Inc.).
If you contribute to RRSPs they will reduce your taxable income, and may produce a tax refund (Source: Government of Canada).
They are also a self-funded pension, so ultimately what you contribute is what you will receive minus the withdrawal tax.
How do you open an RRSP?
All you have to do is go to your bank and ask to open an account.
The financial advisor at your bank will guide you through the rest, but make sure to make an appointment with them.
You can ask as many questions as you need to and learn more about how RRSPs work.
“Your RRSP contribution/deduction limit, is the maximum amount you can contribute to your personal, or a spousal, RRSP in a given year.
The Canada Revenue Agency generally calculates your RRSP deduction limit as follows:
- the lesser of 18% of the earned income you reported on your tax return in the previous year
- including the annual RRSP limit (for 2022, the annual limit is $29,210); plus
- Pension adjustments, past service pension adjustments, pension adjustment reversals, and unused RRSP, PRPP or SPP contributions at the end of the previous year can also affect your RRSP contribution limit.” (Source TD Canada)
This year (2023) the contribution/deduction limit is $30,780. If you over contribute in excess of $2,000, “the CRA will charge you a 1% penalty, assessed monthly, for each month you’re over the limit.” (Source: Wealth Simple)
Also, if you didn’t max out your contribution from the previous year the contribution room carries over to this year.
RRSPs are also a great way to save for some big life events.
Planning on going back to school?
You can withdraw up to $20,000 in total to pay for your, or your spouse’s, full-time education under the Lifelong Learning Plan (LLP).
However, the LLP does not cover your children’s education, so make sure you have this in mind if you’re planning on helping your kids out with their post-secondary tuition.
You will also have to pay it back within an allotted amount of time. So, be sure to budget for this.
Another benefit to having an RRSP is you can borrow up to $35,000 from it tax-free if you are a first-time homebuyer.
To learn more about saving for a home, check out our Different Types of Down Payments article.
Never too early
So when is the right time to open an RRSP account if you don’t have one?
You can start as soon as you begin earning an income and filing a tax return (Source: Co-operators).
And while it’s better to do this as early as possible, if you find yourself to be in a later stage of life—it’s never too late to get started.
And remember, always consult a financial advisor who will work with you to plan and invest in your financial future.
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