Canada Basic 101: Registered Retirement Savings Plan (RRSP) for Canadian Investors and Savers
Today, we are reviewing the Registered Retirement Savings Plan (RRSP) which is very terribly named because you should ABSOLUTELY not use it for savings, but for INVESTING.
Who can contribute
You have to make an earned income to contribute, meaning, get a T4 every year with a salary.
As a freelancer who takes dividends, I do not have this contribution room.
What’s your contribution room
It is 18% of your income up to a maximum of $27,230 for the year 2020 which means an income of $151,277.77
Every year it usually goes up by a bit, you can see the chart here.
You can contribute up to $2000 OVER the limit (honest mistakes happens) and not get penalized.
If you’re transferring investments, they will take the market value of your investment and use it towards the contribution room, not the book value.
If you go over, you are taxed 1% for every month (including the contribution month) that you over-contributed, until you remove the overage.
If you don’t remove the overage it is deducted from next year’s contribution room.
All contribution rooms stay OPEN and don’t disappear if you don’t contribute.
You can check your contribution room using the Canada Revenue Agency (CRA) website and here is how you register.
When do I get taxed?
This is tax-sheltered meaning you DO NOT pay taxes on the money you put into it now, but any money you contributed you can then take out will be taxed including all capital gains, dividends etc.
Basically the opposite of the Tax-Free Savings Account (TFSA)
What can I use it for? NOT SAVINGS PLEASE
You can use it to invest in mutual funds or stocks with, not just for savings.
What happens if I die?
No one can contribute in the excess contribution room you had open on your RRSPs, unless it is to a Spousal RRSP.
IN QUEBEC – you cannot name a beneficiary or successor holder to your RRSP or TFSA, only to your RESP
Little Quirk. Quebec doesn’t allow this.
I am only allowed to name Little Bun as the beneficiary on his Registered Education Savings Plan (RESP).
You need to name beneficiary and successor holders in your trust / will.
You can have as many RRSP accounts as you wish.
I have multiples because I had one from my previous employer that is a locked-in RRSP that I cannot touch until I am 65.
Then I have my own personal RRSPs open to contribute to the maximum to (they are maxed).
You can withdraw the money… with conditions
For the Home Buyer’s Plan or the Education Plan, you can withdraw up to $35,000 as of 2019, without paying taxes on it.
Then, you have to pay back those amounts within 10 years, on a sort of fixed payment plan (they tell you the minimum you need to put back into it each year).
Otherwise, any money you withdraw, will have a WITHHOLDING tax of 10%, which is a tax credit applied to your CURRENT YEAR’S taxes.
You can read SO MUCH MORE about the Home Buyer’s Plan here.