Government income programs make up part of a retirement plan, but they do not provide the level of income that most Canadians look for during retirement. A Retirement Savings Plan (RSP) is one of the best ways to help ensure your financial security. You may also know it as a Registered Retirement Savings Plan (RRSP). Only when it is set up with Canada Revenue Agency is it called a RRSP. Around for over 60 years, the tax structure allows you to defer paying income tax on your deposits and earnings. It is only when you withdraw the money that tax is applied.  Since many Canadians have a higher tax rate during their working years than retirement years, this often results in overall tax-savings.

 

 Notable features 

  • Annual limit contribution – 18% of earned income (subject to the annual contribution limit)
  • Unused contribution room – Carried forward from year to year
  • Home Buyers' Plan
  • Lifelong Learning Plan
  • Income splitting
  • Retirement Income Fund

Your employer typically deducts income tax based on your total annual income. A deposit to your RRSP reduces your taxable income. This means you may end up paying more income tax than required during the year. When you file your tax return with the CRA and claim your RRSP deduction, you would receive a refund for any income tax that was overpaid.

You can locate your maximum contribution limit by looking on your most recent Notice of Assessment. This Notice is issued from CRA. This maximum amount is based on 18% of your previous year’s earned income, up to the maximum RSP contribution limit. It also includes any unused contribution room from previous years. If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP. Unused contribution room can be carried forward and used in future years. 

Other notable features of a Retirement Savings Plan

 

Home Buyers' Plan 

This feature allows you, a first-time home buyer, to withdraw up to $60,000 tax-free to buy or build your first home. The repayment period begins the second year after you withdraw the funds and you have up to 15 years to pay the money back. With home prices on the rise, why not tap into additional resources to increase your down payment.

Lifelong Learning Plan

This feature allows you to go to school or go back to school. Whether for you or your spouse, you can withdraw up to $20,000 tax-free to cover tuition and education expenses. The repayment period gives you 10 years to repay the money you borrowed.

Income splitting

This feature allows one spouse with a higher marginal tax rate to contribute to the RSP of the lower income spouse. Spousal splitting allows the spouse with the higher income to reduce net income and taxable income.

Retirement Income Fund

By the age of 71, you must convert your RSP to a Retirement Income Fund (RIF). A RIF is a way for you to be paid in your retirement. The money you put into the fund over the years is now being paid back to you. A RIF also provides continued growth in a tax-sheltered environment. It offers you a choice in how assets are invested. 

Products that offer an RSP

Equitable Life offers RSPs with a variety of investment options. If you are looking for an investment with a guaranteed interest rate, our Guaranteed Interest Account offers competitive interest rates and a wide variety of investment terms.  Alternatively, our Pivotal Select™ segregated fund product offers a diverse selection of investment funds from a variety of Canadian fund managers. Whether your style is value or growth, you are seeking fixed income or equity, or you are looking for domestic or foreign, our investment options can be tailored to meet your specific objectives. These products provide the protection and flexibility you need, with the tax savings and benefits of an RSP. 

Contributing to an RSP

RSP contributions can be made during the tax year or within the first 60 days of the following tax year. Contributions can also be made monthly. When you contribute monthly, you benefit from something called dollar cost averaging. Dollar cost averaging is an investment strategy. Deposits of a fixed-dollar amount are made at regularly scheduled intervals. This means that you make regular purchases and your costs are averaged over the year. This benefits you in two ways. One is that this helps reduce the impact of a bumpy market. And two, your contributions are compounding over the year, making your money work that much harder for you. Making retirement savings a financial priority can help you achieve your desired retirement income. 

 

Contact your advisor to find out more about how RSPs can be incorporated into your financial plan. If you do not have an advisor and would like to speak to one, call us at 1.800.668.4095 and our customer service team would be pleased to have an advisor in your area contact you.