RRSP Contributions; What’s in it for You?
RRSP contributions are an important part of everyone’s financial plan. RRSPs carry some very advantageous benefits.
What is an RRSP.
A Registered Retirement Savings Plan, or RRSP, is a retirement savings plan created by the Canadian government to encourage taxpayers to save for their future. The idea being that your contributions are deducted from your current income, and then taxed once withdrawn (preferably when you retire and your income is lower).
Your RRSP contributions are tax deductible.
Whatever you put in your RRSP for a tax year is deducted from your taxable income for that year. This is assuming you have the room to do so! That deduction typically generates a tax refund!
The first 60-day rule.
You have the first 60-days of the next year to make contributions that will/can apply to the prior tax year’s return. For 2020 that date is March 2.
RRSP Contribution Room.
Earned income is used to determine the following year’s allowed contribution amount. You generate room using 18% of your earned income. The maximum for 2019 was $26,500.
Your earnings within the RRSP plan are tax deferred. This means you will pay tax on the RRSP plan earnings once you withdraw from the plan.
Loans from RRSPs.
You could take a loan out on your RRSP plan to buy a home or for post-secondary education.
Home Buyers’ Plan (HBP)
The HBP is designed to help you to withdraw up to $35,000 from your RRSP tax-free to pay for a home (subject to certain conditions). You will have to repay this loan by making RRSP contributions. The repayment period is over 15 years.
Lifelong Learning Plan (LLP)
The LLP was designed to help Canadians pay for their post-secondary education. This provision allows you to withdraw up to $20,000 (or $10,000 per calendar year) from your RRSP tax-free subject to certain conditions. For this benefit you also have to repay this loan by making RRSP contributions. The repayment period is over 10 years.
As you can see there are several benefits to making RRSP contributions both immediate and in the future. It is important to start this savings plan early to avail yourself from the tax-free earnings within the plan.