By iA Private Wealth, February 4, 2022
It was introduced in 1957 to help Canadians save for retirement. More than six decades later, the Registered Retirement Savings Plan (RRSP) remains a practical, tax-efficient way to build long-term wealth.
How RRSPs work
You can contribute to an RRSP from the first time you have qualifying earned income until December 31 of the year you turn 71. For any given tax year, you can make contributions during the calendar year or up to 60 days after that. As an example, for the 2022 tax year you can make contributions throughout 2022 or in the first 60 days of 2023.
The maximum annual RRSP contribution is 18% of your earned income for the previous tax year, up to the allowable limit. For instance, the RRSP contribution limit for 2021 was $27,830, while the limit for 2022 is $29,210. You’ll find the annual limits on the Government of Canada website.
Also note the following:
- If you don’t make the maximum contribution in a particular year, the unused room is carried forward indefinitely.
- If you belong to a workplace pension plan, your pension adjustment (PA) will reduce the amount you’re allowed to contribute. The PA amount appears on your T4 tax slip.
- Some employers offer full or partial contribution matching (e.g., if you contribute 4% of your salary to your pension, your employer might match with a 2% contribution). Check with your employer for details.
- If you overcontribute to an RRSP by more than $2,000 (based on your CRA Notice of Assessment), you’ll face a penalty of 1% per month for as long as the excess amount remains in your account.
- You can make a tax-free withdrawal from your RRSP for a down payment on your first home. The Home Buyers’ Plan (HBP) has specific rules and repayment terms, so visit the Government of Canada HBP webpage or speak with your advisor to see if it’s suitable for you.
- You may contribute to your spouse’s or common-law partner’s RRSP if you’re the higher income earner. You’ll receive a tax deduction that may lower your tax bill. Consult with your advisor so you’re aware of the various rules related to spousal RRSPs.
Key RRSP benefits
RRSPs offer an immediate tax break, as your contribution amount is deducted from the year’s gross income, which means less income tax to pay. Many people take the tax savings and invest it or use it to reduce existing debt. Either way, you’ll strengthen your financial position.
Also, any growth in your RRSP from capital gains, dividends or interest will remain tax deferred until you begin making withdrawals in retirement. This feature lets you compound growth in your RRSP without immediate tax consequences, so your money works harder for you and helps build wealth faster for retirement.
RRSPs are flexible as well. You can invest in stocks, bonds, mutual funds, ETFs, GICs and more. For added convenience, consider a pre-authorized contribution (PAC) plan. Once you decide how much to invest, at what interval and in which financial products, the money will be automatically invested according to your instructions. For example, your PAC might allocate $250 per month to a certain mutual fund.
As the March 1, 2022 deadline approaches for 2021 RRSP contributions, consider contributing as much as possible while keeping in mind what’s reasonable for your financial circumstances.
We can help create and maintain an RRSP strategy that’s right for you. Contact us today to find an advisor.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.