 Millions of Canadians contribute to a Registered Retirement Savings
Plan (RRSP) every year. These plans play an important role in ensuring
that individuals have adequate financial resources in their retirement
years. Surveys show that a majority of Canadians don't have a financial
plan to reach their goals.
In order to promote better financial and retirement planning, and to
help you understand RRSPs, the following section covers a variety of
issues relating to RRSPs. Topics include the benefits of owning a plan,
the role of a spousal plan, and what to do with your plan when your
reach retirement.
Remember, it's designed as a guide, so it should not be relied upon to
replace more specific professional advice. Financial and retirement
planning should be ongoing and not left until the end of the year.
RRSP
An RRSP is a savings contract registered with the CRA between you and a
financial institution such as a bank, trust company, credit union or
life insurance company. Your contributions, and the income they earn,
compound tax-free while sheltered in the RRSP. Thus, you accumulate a
larger investment fund. Investment decisions can be made by you through
a self-directed RRSP.
Benefits
The amount you contribute to an RRSP may be deducted from your income on your tax return.
The income is tax-free on your contributions as long as your savings remain in the plan.
- Under special conditions, this tax-free income may include mortgage interest you may be paying on your personal residence.
- A spousal RRSP can split retirement income between a husband and wife.
- Your retirement income is increased above the amount non-RRSP investments could provide.
- Cash may be withdrawn for any purpose before retirement. It is
taxable in the year of the receipt and therefore should only be
withdrawn in a low income year.
RRSP Contribution Room
Your notice of assessment for your 2005 T-1 Return provides a dollar
maximum which you may contribute to an RRSP and claim as a deduction on
your 2006 return. This advice has the title "2006 RRSP Deduction Limit
Statement." Any unused contribution room is carried forward
indefinitely.
Spousal RRSP
Any portion of your allowable contribution may be allocated to a
spousal RRSP, regardless of whether your spouse had earned income, as
long as the total amount you contribute does not exceed your unused
contribution limit. This could enable you to split your retirement
income. An additional tax saving could be gained by both you and your
spouse being eligible, after 65, for the tax credit based on pension
income.
Common-law spouses are now treated the same as married spouses for this
purpose. If funds are withdrawn from a spousal RRSP within three years
of the last contribution, the person who claimed the deduction may be
taxed on the amount withdrawn. If you are uncertain as to who will be
taxed, consult your CGA prior to making a withdrawal.
Contributions and Deductions
- To obtain a deduction for 2006, your contribution must be made by March 1, 2007.
- If you are self-employed or your employer does not operate a
registered pension plan or deferred profit-sharing plan (DPSP) for your
benefit, you may deduct 18 per cent of your previous year's earned
income up to a maximum of $16,500; or
- If your employer operates a registered pension plan or DPSP into
which you or your employer contributes on your behalf, and from which,
by reason of membership, you are or may become entitled to benefits,
you may deduct 18 per cent of your previous year's earned income up to
a maximum of $16,500, minus the value of your pension benefits accrued
during the year in the employer pension plan or DPSP.
- In special circumstances you may transfer amounts in excess of the above limits into your RRSP.
These include:
- Lump sum payments from company pension plan and DPSP;
- Lump sum payments from foreign pensions and a United States IRA, under certain conditions;
- Spousal transfers;
- retiring allowances; and
- RRSP proceeds from your spouse's estate.
- Contributions can be made at any time during the year.
Over-Contribution Limit
A word of warning: Cumulative over-contributions that exceed your
cumulative contribution limit by $2,000 are subject to a severe monthly
penalty on the excess portion.
Over-contributions made before February 27, 1995, remain penalty-free, provided the former limit of $8,000 was not exceeded.
Question:
What is the maximum contribution allowed as a tax deduction for Registered Retirement Savings Plans?
Answer:
If you are NOT covered by a pension plan, the deduction limit is the
lesser of either $15,500 or 18 per cent of your 2005 earned income,
plus any RRSP contribution room carried forward from previous years.
However, if you're employed and covered by a pension plan, your maximum
RRSP contribution is reduced by the amount of the pension adjustment
which appears in Box 52 of your 2006 T-4 slip.
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