One of the most important retirement and tax planning strategies available to Canadian taxpayers is contributing to an RRSP. Under certain restrictions, contributions made to a plan no later than 60 days after the end of the current year may be deducted from income in the next year.
The foundation of your retirement
An RRSP offers both short-term and long-term tax benefits that can aid in funding your desired retirement.

How does it work?

  • Consult a financial advisor to start an RRSP with the appropriate investments based on your risk tolerance and retirement plans.
  • Choose the contributions that are appropriate for your circumstances, being careful not to exceed your allotted contribution room.
  • Your taxable income can be reduced by your yearly contributions, which will lower your overall tax burden.
  • Any growth on investments occurs tax-free.
  • Money is there whenever you need it, but withdrawals are taxed.
  • If you meet the requirements, you can also withdraw money tax-free to pay for your spouse’s or your own schooling or to purchase your first home.
  • Your RRSP becomes an RRIF and you are required to withdraw the minimum amount each year when you reach retirement age or turn 71. An alternative is to buy an income annuity.

 

 

What is your RRSP contribution limit?

    Generally, your contribution limit is calculated by the Canada Revenue Agency based on these 3 factors

    • Total of your unused deduction room from the previous year
    • Now add the smaller amount of:
    • – 18% of the earned income you reported on your tax return last year
    • – $29,210 (the annual limit for 2022)
    • Then subtract any pension adjustment from the previous year (if applicable)

What happens if you go over your RRSP limit?

You will be taxed 1% per month on any amount that is more than $2,000 over your contribution limit. If you don’t pay the additional tax within 90 days after the calendar year, you’ll face late-filing penalties or interest charged.

What is an RRSP?

It is a retirement savings and investment account that is authorised by the Canada Revenue Agency (CRA) and offers Canadians advantages to save for retirement. You pay less income tax since the funds you contribute to an RRSP aren't included in your taxable income.
It differs from a regular savings account in that it serves as a place for investments where any growth is tax-free until the money is withdrawn. When you withdraw your money, you will typically be retired, which means that you will pay less tax than during your years of greater income and be able to keep more of your money for retirement.

Pay less tax now

Your taxable income is decreased by contributions to an RRSP, allowing you to save for retirement while paying less income tax.

Keep more of your investments

You don’t pay tax on the growth of your investments in your RRSP until you withdraw it so you can keep more of your money.

Help buy a first home or go to school

Use money from your RRSP to help buy your first home or fund you or your spouse’s education.

What are the tax advantages?

Up front advantages

By reducing your taxable income at the same time as you save, you’ll essentially be paying yourself twice. Let’s imagine you have an annual salary of $80,000 and elect to contribute the maximum amount allowed to your RRSP, which is $14,400. Only $65,600 of your income will be taxed by the CRA when it comes time to file your taxes.

Future advantages

Unless you withdraw money from your RRSP, usually in retirement when your tax rate is lower, any increase on your investments is tax-sheltered.