RRSP PRIMER
How to contribute, besides early and often
As broad-based funds gyrate with the markets, look to specialty products to fill RRSP needs
BY GAVIN ADAMSON
What it is
A registered retirement savings plan (RRSP), registered with Canada Revenue Agency, is intended to help Canadians save for retirement.
The money you invest in your RRSP is tax-deductible and the accumulated income grows tax-free until you withdraw the funds.
When you cash in your RRSP, or make a withdrawal from it, you usually have to pay tax. But when this is done in retirement, you will likely be in a lower tax bracket than when you were earning income.
Work ethic
56%
Proportion of Canadians who say they plan to work as long as possible.
38%
Portion who expect to work past age 65.
82%
Portion of Canadians who say they would keep working even if they had enough money to retire.
Source: Royal Bank of Canada 18th annual RRSP poll
How to do it
You can open an RRSP when you are 18, or as soon as you start earning income. As many experts point out, the earlier you start saving, the more you will accrue, thanks to the effects of compounded interest.
You will need a Social Insurance Number so your plan can be registered with the government.
You can set up your RRSP at any financial institution, such as your bank, credit union, trust or insurance company; there, you can also get advice about what sorts of investments are eligible. These include cash, guaranteed income certificates, mutual funds, and publicly traded stocks and bonds.
After you make a contribution, you will get a receipt to file with your income tax form; your contribution will count as a tax deduction.
You can make RRSP investments with more than one financial institution but because each one will be registered to your SIN, they will all be part of your RRSP portfolio. (When people talk about “buying an RRSP” they mean “making a contribution to my RRSP.”)
Deadline alert
You have until Friday, Feb. 29, to make your contribution for the 2007 tax year.
Contribution limits
Generally, the amount you can invest in your RRSP for a given tax year is determined by your “deduction limit,” also known as contribution room, which is calculated by Canada Revenue Agency.
Your personal limit is shown on the CRA “Notice of Assessment” that would have been sent to you after your 2006 tax return was processed.
You can also contact a CRA tax office, or inquire online at http://www.cra-arc.gc.ca to find out what your limit is. (If you belong to an employer-sponsored pension plan, your limit will take that into account.)
For the 2007 tax year, the most you can put into your RRSP is $19,000. If you are carrying forward unused contribution room from previous years, however, you may be allowed to contribute more.
If you exceed your limit, that is considered an over-contribution – which may be subject to a tax of 1 per cent per month. The lifetime allowance for over-contributions is $2,000.
Foreign assets
As of Jan. 1, 2005, you are allowed to hold foreign properties in your RRSP with no limits.
Self-directed RRSPs
With a self-directed RRSP, you can manage your own portfolio by investing in a variety of instruments – cash, bonds, shares, mutual funds, or even your mortgage. If you’re considering this type of plan, it’s wise to get advice from your financial institution or a professional financial adviser.
Spousal RRSPs
A spousal or common-law partner plan can ease the tax burden in a couple’s retirement years if one spouse expects to have a significantly higher income than the other. The higher-income spouse makes the RRSP contributions and gets the tax deductions at the time – but the plan is registered in the name of the lower-income spouse, who can withdraw funds from it later.
Making withdrawals
Ideally, your RRSP is set up for the long term. But you can withdraw part, or all, of your savings at any time - so long as you realize that the money you withdraw becomes income and you will likely have to pay tax on it.
The government does have two programs that let you borrow from your RRSP without having to pay tax, so long as you meet certain requirements:
One is the Home Buyers’ Plan. It’s a one-time-only program that lets you withdraw up to $20,000 from your RRSP to buy your first home (but not subsequent homes or secondary properties); at least 1/15th of the amount you borrow must be repaid to your RRSP, starting two years after you make the withdrawal.
The other federal program is the Lifelong Learning Plan, which helps pay for postsecondary education or full-time training. You can withdraw up to $10,000 per calendar year from your RRSP for this purpose (to a maximum of $20,000 over four consecutive years). The student can be you or your spouse, but not your children. You then have to repay to your RRSP at least 10 per cent of the borrowed amount each year, over a maximum of 10 years.
RRSP lifespan
The last day on which you can contribute to your RRSP is Dec. 31 of the year in which you turn 71.
That is also the deadline by which you must close out your plan.
Most Canadians transfer their RRSP assets to a registered retirement income fund (RRIF) or buy an annuity with all or part of the proceeds. You could also convert your plan to cash and withdraw in one lump sum, but that would likely result in a very large tax bill.
Sources: Canada Revenue Agency, CARP websites
Special to the Globe and Mail
Who has RRSPs
Six out of every 10 Canadian families have registered retirement savings plans, with a median value of $25,000 (median is the point at which half is above and half below).
90 per cent of families with income of more than $85,000 have an RRSP, with a median value of $80,000.
35 per cent of families with incomes under $36,500 have RRSPs, with a median value of $10,000.
In families where the main income earner is aged 25 to 44, more than one-half (56 per cent) have RRSPs. That compares with 68 per cent for families where the main income earner is in the 45-to-54 age group.
What’s in the plans
The most common RRSP holding is mutual funds (held by 38 per cent of investors), followed by guaranteed investment certificates (20 per cent).
About 60 per cent of families hold their entire portfolio in variable-value assets (mutual funds, income trusts, stocks and bonds).
About 25 per cent hold only assets that have predictable values (GICs, Canada Savings Bonds, treasury bills).
Only 7 per cent hold stocks, with a median value of $20,000.
Age-related choices
Among families with main income earner aged 25 to 44:
35 per cent hold mutual funds/income trusts
15 per cent have GICs/treasury bills
6 per cent hold stocks.
In families where the main earner is aged 45 to 55:
46 per cent hold mutual funds/income trusts
24 per cent have GICs/treasury bills
9 per cent hold stocks.
For those with main earner in the 55-to-65 age group:
50 per cent hold mutual funds/income trusts
26 per cent have GICs/treasury bills
9 per cent hold stocks.
In families where main earner is aged 65 to 69:
22 per cent hold mutual funds/income trusts
19 per cent have GICs/treasury bills
6 per cent hold stocks.
Source: Statistics Canada, 2005 Survey of Financial Security
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