What is a Registered Retirement Savings Account (RRSP)?
A RRSP is a Canadian Account where you can save and invest money for retirement and it is part of a Government program where you will receive tax benefits.
There are many reasons why opening an RRSP account is a good choice, some of which are:
- Contributions are tax-deductible – When you file your taxes your yearly RRSP contribution can be used as a tax deduction.
- Tax Free on investment earnings – As long is the money is sitting in the RRSP account you will not have to pay any taxes on any investment earnings which allows you to save and grow your money.
- Borrow Money – You can borrow money from your RRSP for education through a government offered program called the Life Long Learning Plan (LLP) or to put towards a down payment on a new home through the Home Buyers Plan (HBP).
- Spousal RRSP – you can contribute to a Spousal RRSP to help build your spouses contribution if one spouse makes more money than the other.
- Convert an RRSP into a RIFF – once you retire you can convert your RRSP into a RIFF account, tax free. By doing this, it will allow you to receive regular payments when you retire. Note: you will have to pay taxes on the payments received.
The amount of your yearly contribution is based on your earned income from the previous year, earned income includes: salary, business income, disability pension, taxable alimony, rental income, and employee profit sharing income. If you over contribute to your RRSP it could result in penalties.
Also, remember if you withdraw from your RRSP, the amount withdrawn will be added on to your earned income for that year and could result in higher taxation for that year.
You can set up a contribution payment schedule to start saving into your RRSP throughout the year.
A Spousal RRSP is an RRSP account where the owner and the contributor are two different people. One spouse owns it and the other spouse contributes to it.
What are the benefits of a Spousal RRSP? They are:
- After you turn 71 you can no longer contribute to your RRSP. If you are the higher income earner and are 71 or older you can still contribute to your spouse’s RRSP account.
- If one spouse does not work and has no income for that tax year, the Spousal RRSP can be very helpful if you redeem from you RRSP for that year. The working spouse would then deposit into the spousal RRSP and get the tax deduction.
- It allows you to balance your income if one spouse makes more money than the other as well it is a way for couples to split their retirement income.
By contributing to a spousal RRSP, it allows your money to grow and you will not pay any taxes on it until you redeem the money.
A RESP is an investment account where parents can save for their children’s post-secondary education, like other registered plans, the plan holders can enjoy certain tax benefits with restrictions.
Some benefits of contributing to RESP if you are saving for a child 17 & under are:
- The Government will add to your child’s RESP to help the savings grow. This is called the Canada Education Savings Grant (CESG) and it will match 20% of your contribution up to $500 per year. For example; if you contribute $1,000 into an RESP in 2016, the Government will also contribute
$200 into that same RESP bringing your total contribution for 2016 to $1,200. There may also be additional grants and bond programs available depending on the net income of primary caregivers of the child.
- There is no tax on investment earnings as long as they stay in the RESP. The contributions are not tax-deductible but can be withdrawn from the RESP tax-free at anytime.
- You can set up a monthly contribution payment plan or you can contribute a lump sum of money every year. There is a lifetime maximum of $50,000 per child.
- Once your child is enrolled in a post-secondary university or college program and has proof of enrollment, the child can take the money out of the RESP.
To open a RESP account for you child you must have a social insurance number for the child.
TFSA contributions are not tax deductible although any of the growth you make on any investment in your TFSA is not taxed.
This is the newest incentive from the Canadian government to try and help Canadians save for their futures. TFSA’s are great if you are wanting easy access to your money, need to save for a big purchase in the future, or you don’t earn income but want to contribute to a registered account.
TFSA’s are a great way to save money for large purchases or retirement. Some facts about TFSA’s are:
- They are available to Canadians who are 18 years of age or older
- TFSA’s have an annual contribution limit that is indexed for inflation
- TFSA’s can be used to save to make large purchases
- You don’t need to have earned income to contribute to a TFSA
- You don’t have to file a tax return or set up a TFSA to earn contribution room
- When you make a withdrawal from a TFSA you don’t have to pay taxes on it and you can re-contribute the money the following year
- You can invest in stocks, bonds, mutual funds or GIC’s
- You can contribute to your spouse’s TFSA as well a your own
By contributing to a TFSA you can save your long or short term goals without paying taxes on your investment income and your money is easy accessible.
A RRIF Account is an investment account that is used to provide you with income during your retirement while earning money on your investments.
You can buy stocks, bonds, mutual funds, ETF’s, or GIC’s and earn money while you are retired.
At the age of 71 you must have your RRSP converted to a RRIF or annuity. There are very specific rules as to how much money you must take out per year, the minimum amount you must withdraw is determined by your age.
A benefit to a RRIF is that you can convert your RRSP to a RRIF which means you can avoid a large tax bill for redeeming from you RRSP. You are also able to withdraw any amount at anytime from a RRIF, but remember, the money you withdraw does count as income so you will have to pay taxes on the money you withdraw.
A savings account called a Non-Registered Account, also called an “Investment Account” on many financial institution quarterly statements, is an account to save money in that is not tracked by the government. Basically, there are two types of savings accounts; ones the government tracks the usage of and ones that the government doesn’t. So the RRSP, TFSA, RESP, and the RRIF savings plans are all registered savings plans because the government tracks how much money is put in and pulled out of them.
So any investment account that is not tracked by the government we could say is a non-registered account. Examples of things that can be called Non-Registered Accounts, or “Investment Accounts” as they are commonly named on statements from major financial institutions, are:
- Your daily bank account
- Your stock trading account that is not registered as a RRSP, TFSA, etc.
- Your house could be considered a non-registered savings plan as it is building wealth (most of the time)
- Collectibles, cars, boats, investment properties.
- GIC’s that are owned outside of a registered plan
Basically any account or investment that you are trying to use to build wealth that is not a RRSP, TFSA, RESP, or RDSP is a non-registered savings account and any growth or losses incurred need to be reported to the government for taxation purposes. Taxes what? Yes taxes. Registered Plans are tax-sheltered, tax-deferred, and/or tax free so it is non-registered accounts that have more
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