An RRSP is a retirement savings plan that is registered with the federal government. Any income that is earned within your RRSP is usually exempt from tax as long as the funds remain in the plan. Annual contributions to your RRSP (or your spouse’s RRSP) can be deducted from your income, up to certain limits.
An RRSP’s purpose is for growth to help pay for retirement. In the year you turn 71, an RRSP must be converted into a RRIF. Your RRIF converts your RRSP savings plan into an income-paying plan. A RRIF is like your personal pension plan. The amount you must take out of your RRIF in your 72nd year is a pre-determined percentage of your RRIF portfolio. Let’s take a look at these two plans a little more closely.
Contributions to an RRSPOnce you start earning employment income, you begin to establish your RRSP Contribution room. Your contribution room (or deduction limit) is the amount that you are allowed to put into your RRSP (or a Spousal RRSP) in any given year. It is calculated as 18% of your earned income, to a maximum of $20,000 for 2008, $21,000 in 2009 and $22,000 in 2010. Unused contribution room in any given year is carried forward and can be used in future years. If you did not use all your contribution room between 1991-2008, that room can be added to the current year’s contribution maximum. This maximum amount of contribution room also applies to your contributions to your spouse’s RRSP.
Withdrawals from an RRSPYou do not have to wait until you convert your RRSP into a RRIF to take payments. Unless the RRSP is locked-in, you are free to withdrawal your funds at anytime. There are withholding taxes, however, based on the amount of money you pull out of your RRSP. For withdrawals up to $5000, the tax is 10%, from $5000.01 to $15,000 it is 20%, and over $15,000 the tax is 30%.
There are two withdrawals from your RRSP that do not trigger the withholding tax:
- Withdrawals for the Home Buyers Plan
- Withdrawals for the Lifetime Learning Plan
Both of these programs have defined schedules for repayment. As long as you repay your RRSP according to the schedule, withholding tax can be avoided.
Finally, any amount net of the withholding tax needs to be included in your income the year of the withdrawal.
For more information on RRSPs and RRIFs, please contact us at 604-685-3264.