RRSP Contributions

March 1, 2010 …for some it will be a great day on the slopes, a birthday, an anniversary, another day at work and for others, the disappearance of the little black cloud that has been hanging over their heads because they will have made the final contribution to their RRSPs for the 2009 tax year.

Of course most of you already know about this deadline but I thought I would take the opportunity to bring a few key terms to your attention since these RRSPs affect us differently during the course of our lives.

To begin, RRSP is the abbreviation for Registered Retirement Savings Plan and it is a program administered by the Canada Revenue Agency (CRA). The contributions that you make to your plan are invested and these along with their growth will provide you with an income when you are ready to retire.

Why should you contribute?
1. You receive a tax deduction for the amounts you contributed during the year and the first 60 days of the subsequent year
2. The growth of your contributions into your plan is tax deferred
3. At retirement, you will pay less tax on your withdrawals assuming you will be in a lower tax rate.

Please note that if you receive an unexpected inheritance which would increase your taxable income, the third advantage may no longer be applicable.

When can you begin contributing? At the age of 18 and once you have begun earning employment income and or rental income.

How? Make an appointment with an advisor at one of the banks, credit unions or other financial institution.

Ideally, you should contribute to our RRSP on a regular basis and only plan to withdraw your funds at retirement. However, there are some exceptions.

Home Buyers’ Plan (HBP) You can use your RRSP to help with the purchase of your first home. Under this plan, you can withdraw, tax-free, from your RRSP and have 15 years to reimburse it starting two years after the purchase of your home.

Lifelong Learning Plan (LLP) You can use your RRSP to help with tuition if you return to school on a full-time basis. Under this plan, you can withdraw up to $10,000 per year, tax-free, for a total of $20,000 from your RRSP or your spouse’s and you have ten years to reimburse it.

You can withdraw from your RRSP at any time. However, it is preferable to do so when you are in a lower income year such as during a parental leave or a period of unemployment.

Spousal RRSP If your spouse will be in a lower tax rate than you at retirement, you can contribute to a RRSP for your spouse as long as you have available RRSP contribution room (refer to the Notice of Assessment you receive from CRA after filing your tax return). The advantage is that the contribution is tax deductible for you and that the withdrawals will be taxable under your spouse who will be in a lower tax rate, unless withdrawn within three years.

71 years old To take full advantage of the tax deferrals offered by an RRSP, you should wait until the end of the year in which you turn 71 and then consider either purchasing an annuity or transfer your RRSP assets to a Registered Retirement Income Fund (RRIF).

The information provided is general and as with any tax matter there are many aspects to take into consideration when making a decision. Please contact a professional.