January to the end of February is known as the ‘RRSP’ season. There is always a huge rush to make RRSP (Registered Retirement Savings Plan) contributions, especially on the last day. In 2013 alone, Canadians contributed 37.4 billion to their RRSP, according to Statistics Canada (CBC). Regardless of what time of the year it is, you should always keep your retirement savings in mind when dealing with your personal finances. It’s as simple as setting up an automatic contribution (monthly, biweekly, etc…). Why wait until the last minute?
Below are the 5 important RRSP rules you should know. Don’t procrastinate. Leaving your retirement savings until the last minute is a very costly mistake, financially, and socially.
Home Buyer’s Plan
If you’re thinking about buying a home, RRSPs can come in handy. An individual can withdraw up to $25,000 in a calendar year from their RRSP towards a qualifying home. The funds need to repaid within 15 years. It can be paid in installments, or at once. Yes, withdrawing from your RRSP can cause you to lose the time value from your investments. However, having a smaller down payment leads to hefty CMHC premiums. Keep in mind the CMHC premiums increase the borrowed amount – leading to larger mortgage payments. Depending on your situation, it may be worth it to take advantage of the home buyers plan, in order to have lower mortgage payments.
Lifelong Learning Plan
RRSP account holders can also fund their education under the Lifelong Learning Plan. This program allows you (or your spouse) to withdraw up to $10,000 per year to a maximum of $20,000 in a lifetime. The taxpayer has 10 years to repay the funds – typically 1/10 of the balance has to be repaid each year (CRA). When the repayment is less than the required yearly amount, the difference gets added onto line 120 of the income tax and benefit return.
The contribution limit depends on your income – the exact amount can be found on from T1028, Your RRSP Information. This information can also be found on amount (A) of the RRSP Deduction Limit Statement on your latest notice of assessment from the CRA. There is a penalty for over-contribution, so make sure to keep track of the numbers. The penalty is 1% per month on the contributions that surpass the deduction limit by more than $2000.
Unused contributions are carried forward to the upcoming years. This is can be extremely useful if you are expected to earn more income in the near future. You would be able to deduct your taxable income with RRSP contributions (from the current year, and carried RRSP contributions). Keep this strategy in mind before using your RRSP contributions to deduct your current taxable income – you may gain more when you take advantage of it in the future, where you’re earning more money.
I highly recommend not withdrawing from your RRSP unless it’s under the Home Buyer’s plan or the Lifelong Learning plan. If you need cash urgently, withdrawing from your RRSP should be the absolute last resort. Withdrawing from your RRSP yields to larger taxes payable, since the amount gets added to the taxpayer’s income. If you know ahead of time that you would need the funds in the short-medium term (or before retirement), then invest within a Tax Free Savings Account (TFSA).
Let’s assume you’re going to retire in 40 years. At retirement, you would have $200,566.77 less if you delay your $50 biweekly contributions by 10 years. This number only gets bigger as you delay your savings for a longer period. No contribution is too small – it’s as simple as setting a portion of your paycheque towards retirement savings. Have the whole process automated as well (to make your personal finances easier to manage). Saving 10% is of your income is a general rule of thumb for having adequate retirement savings.
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Writer: Jelani Smith
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