RRSPs: Key Benefits

There are two key ways that a Registered Retirement Savings Plan (RRSP) can help you reduce taxes:

• RRSP contributions are tax-deductible up to your RRSP contribution limit. For 2019, your limit is 18% of your previous year's earned income, minus any pension adjustments, up to a maximum of $26,500. Any unused contribution room since 1991 accumulates and carries over indefinitely. For example, a $10,000 RRSP contribution could generate a tax savings of $4,000 if your marginal tax rate is 40%.
• Within an RRSP, any income, dividends and capital gains on your investments is tax-deferred – meaning that they are not taxed in the year you earned it. However, when you withdraw any amount from an RRSP, it is fully taxable at your marginal rate. The idea is that, if you withdraw during retirement when you are earning less income, your tax rate will be lower. This leaves you with more money to pay for your retirement expenses.

Considerations for homebuyers and lifelong learners

Saving for retirement can sometimes force other priorities like buying a home and continuing education to the back burner. The good news is, you can use your RRSP to help achieve these two milestones through the Lifelong Learning Plan (LLP) and the Home Buyers’ Plan (HBP).

With the LLP, you can use your RRSP to pay for education for yourself or your spouse or common-law partner. While you don’t pay taxes on the withdrawal, you do have to repay the LLP amount you withdrew from your RRSP over 10 years. Generally, each year you have to repay 10% of the total amount you withdrew until the full amount is repaid.

The HBP allows you to withdraw up to $35,000 to purchase your first home. Again, while you don’t pay tax on the withdrawal, you do have to repay the withdrawal over 15 years. Every year, Canada Revenue Agency will send you a Statement of Account with your Notice of Assessment that will include the minimum you have to contribute to your RRSP and designate as a repayment for the following year.

To see how the HBP can work, suppose you contributed to your RRSP in your first years of working and now have $45,000 saved. With the HBP, you can borrow up to $35,000 from your RRSP tax-free. If you withdraw the remaining $10,000 for a greater down payment, it is taxable as income in the year you withdraw it.

Visit the Government of Canada website at www.canada.ca for more information.

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.