Registered Retirement Savings Plan
Encyclopedia
A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement
by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Rules determine the maximum contributions, the timing of contributions, the claiming of the contribution tax credit, the assets allowed, and the eventual conversion to an RRIF (Registered Retirement Income Fund) in retirement. Approved assets include: savings account
s, guaranteed investment certificate
s (GICs), bond
s, mortgage loan
s, mutual funds, income trust
s, corporate shares (stock
s), foreign currency and labour-sponsored fund
s.
RRSPs have five effects:
. Since Canada has a progressive tax
system, taxes are reduced at the highest marginal rate. Increases in the value of the plan assets (whether capital gain
s, interest income or other) are not subject to income or other taxes in Canada until funds are removed from the RRSP. Disbursements from an RRSP are taxable as income at the time of withdrawal - regardless of the type of profit earned while inside the RRSP.
The primary difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.
A deduction limit is calculated as the unused deduction limit from the prior year, plus 18% of a person's earned income from the previous calendar year up to a specified maximum, minus any pension adjustment (PA) and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR). The CRA calculates the RRSP deduction limit for the next year and prints it on every Notice of Assessment or Reassessment, provided the taxpayer is 71 year or younger. It is also recalculated and a copy mailed in certain cases such as when a PSPA or PAR is issued.
The specified maximum has been rising as shown in the table below.
After 2010 the RRSP contribution limit will be indexed to the annual increase in the average wage.
After filing a tax return
(or any adjustments to the tax return), each tax payer receives a Notice of (Re)Assessment from the Canada Revenue Agency
, indicating their new RRSP deduction limit.
While it is possible to contribute more than the contributor's deduction limit, it is generally not advised as the excess amount (presently $2,000 over the deduction limit) is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).
RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year's return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year. Note that reporting and using are two different things. All other contributions may be used in the same tax year or held for future use.
An account holder is able to cash out an amount from an RRSP at any age. However, any amount withdrawn qualifies as taxable income and is therefore subject to withholding tax.
Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund
(RRIF) or an annuity. Previous to 2007, account holders were required to make this decision at age 69 rather than 71.
Investments held in an RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time, an individual's income is expected to be lower and therefore subjected to less tax.
and investment # 2 with Mackenzie Financial, this would result in the individual having two separate RRSP accounts held with two different companies.
The main benefit of client-held accounts is that they do not generally incur annual fees. The main detriment is that investors must keep track of each RRSP investment made with each separate company.
and investment #2 with Mackenzie Financial, both investments are held in a single RRSP account with the nominee, Royal Bank.
The main benefit of a nominee account is the ability to keep track of all RRSP investments within a single account. The main detriment is that nominee accounts often incur annual fees.
A "self-directed" RRSP (SDRSP) is a special kind of nominee account. It is essentially a trading account at a brokerage that has tax-sheltered status. The holder of a self-directed RRSP instructs the brokerage to buy and sell securities on their behalf as with any brokerage account. The reason that it's described as "self-directed" is that the holder of this kind of RRSP directs all the investment decisions themselves, and does not normally have the service of an investment advisor.
As a result, the advisor will approach an intermediary company which is able to offer the investor identical benefits as those offered by a nominee account. The three main Canadian companies who offer intermediary services are B2B Trust
, M.R.S. Trust, and Canadian Western Trust (CWT).
The main benefits and detriments of Intermediary accounts are identical as those offered by Nominee accounts.
Retirement
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours.Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to...
by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Rules determine the maximum contributions, the timing of contributions, the claiming of the contribution tax credit, the assets allowed, and the eventual conversion to an RRIF (Registered Retirement Income Fund) in retirement. Approved assets include: savings account
Savings account
Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
s, guaranteed investment certificate
Guaranteed Investment Certificate
A Guaranteed Investment Certificate or GIC is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or...
s (GICs), bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
s, mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s, mutual funds, income trust
Income trust
An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital.The main attraction of income...
s, corporate shares (stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
s), foreign currency and labour-sponsored fund
Labour Sponsored Venture Capital Corporation
A labour-sponsored venture capital corporation ', known alternately as labour-sponsored investment fund ' or simply retail venture capital, is a fund managed by investment professionals and invested in small to mid-sized Canadian companies...
s.
RRSPs have five effects:
- Taxes on earned (employment) income (to the extent contributed to the plan) are deferred until the eventual withdrawals from the plan. There is no benefit from the deferral because it is an accrued liability that grows at the same rate as the investments themselves. The tax deferred is commonly called the contribution tax credit.
- Income earned inside the plan on the after-tax savings (excluding the contribution tax credit) is not taxed either while within the plan or on withdrawal. Asset classes that attract the highest taxes (%income * %tax rate) are best kept within the plan to maximize the deferral benefit.
- One's marginal tax rate when withdrawing cash may be higher (or lower) than the rate at which one claimed the original contribution credit. This creates a penalty (or benefit) equal to: ( Change in tax rate % ) divided by ( 1 minus tax rate on contribution ).
- Canada has a variety of programs available to retired people whose benefits decrease as one's income increases. By deferring the income until retirement, the additional income created at that time may reduce those benefits.
- Claiming the contribution tax credit may be deferred until a later year (when the expected marginal tax rate is higher), but there is a penalty for the delay. The penalty equals the income the tax credit would have earned during the delay.
Taxation
For the most part, contributions to RRSPs are deductible from taxable income, reducing income tax payableIncome tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
. Since Canada has a progressive tax
Progressive tax
A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate...
system, taxes are reduced at the highest marginal rate. Increases in the value of the plan assets (whether capital gain
Capital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
s, interest income or other) are not subject to income or other taxes in Canada until funds are removed from the RRSP. Disbursements from an RRSP are taxable as income at the time of withdrawal - regardless of the type of profit earned while inside the RRSP.
Individual RRSP
An Individual RRSP is associated with only a single individual, termed an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.Spousal RRSP
A Spousal RRSP allows a higher earner, termed a spousal contributor, to contribute to an RRSP in the spouse's name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.Group RRSP
In a group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified.The primary difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.
Contributing
A RRSP deduction limit is the maximum amount of RRSP contributions that can be claimed on a tax return for a given tax year.A deduction limit is calculated as the unused deduction limit from the prior year, plus 18% of a person's earned income from the previous calendar year up to a specified maximum, minus any pension adjustment (PA) and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR). The CRA calculates the RRSP deduction limit for the next year and prints it on every Notice of Assessment or Reassessment, provided the taxpayer is 71 year or younger. It is also recalculated and a copy mailed in certain cases such as when a PSPA or PAR is issued.
The specified maximum has been rising as shown in the table below.
| Year | Contribution Limit |
|---|---|
| 2004 | $14,500 |
| 2005 | $16,500 |
| 2006 | $18,000 |
| 2007 | $19,000 |
| 2008 | $20,000 |
| 2009 | $21,000 |
| 2010 | $22,000 |
After 2010 the RRSP contribution limit will be indexed to the annual increase in the average wage.
After filing a tax return
Tax return (Canada)
Normally, Canadian Individual tax returns for any specific year must be filedby April 30 of the following year. There is no provision for generally extending this deadline, but there are a few exceptions....
(or any adjustments to the tax return), each tax payer receives a Notice of (Re)Assessment from the Canada Revenue Agency
Canada Revenue Agency
The Canada Revenue Agency is a federal agency that administers tax laws for the Government of Canada and for most provinces and territories, international trade legislation, and various social and economic benefit and incentive programs delivered through the tax system...
, indicating their new RRSP deduction limit.
While it is possible to contribute more than the contributor's deduction limit, it is generally not advised as the excess amount (presently $2,000 over the deduction limit) is subject to a significant penalty tax removing all benefits (1% per month on the overage amount).
RRSP contributions within the first 60 days of the tax year (which may or may not be the calendar year) must be reported on the previous year's return, according to the Income Tax Act. Such contributions may also be used as deduction for the previous tax year. Note that reporting and using are two different things. All other contributions may be used in the same tax year or held for future use.
Withdrawals
- For a complete article on Registered Retirement Income Funds (RRIF), see Registered Retirement Income FundRegistered Retirement Income FundA Registered Retirement Income Fund or RRIF is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan...
.
An account holder is able to cash out an amount from an RRSP at any age. However, any amount withdrawn qualifies as taxable income and is therefore subject to withholding tax.
Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund
Registered Retirement Income Fund
A Registered Retirement Income Fund or RRIF is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan...
(RRIF) or an annuity. Previous to 2007, account holders were required to make this decision at age 69 rather than 71.
Investments held in an RRIF can continue to grow tax-free indefinitely, though an obligatory minimum RRIF withdrawal amount is cashed out and sent to the account holder each year. At that time, an individual's income is expected to be lower and therefore subjected to less tax.
Home Buyer's Plan (HBP)
While the original purpose of RRSPs was to help Canadians save for retirement, it is possible to use RRSP funds to help purchase one's first home under what is known as the Home Buyer's Plan. Canadians can borrow, tax-free, up to $20,000 from their RRSP (and another $20,000 from a spousal RRSP) towards buying their residence. This loan has to be repaid within 15 years after two years of grace. Contrary to popular belief, this plan can be used more than once per lifetime, as long as the borrower did not own a residence in the previous five years, and has fully repaid any previous loans under this plan. In the January 27, 2009, Federal Budget, the Minister of Finance announced that the $20,000 limit will be increased to $25,000.Lifelong Learning Plan (LLP)
Similarly to the Home Buyer's Plan, the Life-Long Learning Plan allows for temporary diversions of tax-free funds from an RRSP. This program allows individuals to borrow from an RRSP to go or return to post-secondary school. The user may withdraw up to $10,000 per year to a maximum of $20,000. The first repayment under the LLP will be due at the earliest of the following two dates.- 60 days after the fifth year following the first withdrawal
- the second year after the last year the student was enrolled in full-time studies
Account structure
Both Individual and Spousal RRSPs can be held in one of three account structures. It should be noted that one or more of the account types below may not be an option depending on what type of investment instrument (example stocks, mutual funds, bonds) is being held inside the RRSP.Client-held accounts
Client-held, or client-name accounts, exist when an account holder uses their RRSP contributions to purchase an investment with a particular investment company. Each time an individual uses RRSP contribution money to purchase an investment at a different fund company, it results in a separate client-held account being opened. For example, if an individual buys investment # 1 with Fidelity InvestmentsFidelity Investments
FMR LLC or Fidelity Investments is an American multinational financial services corporation one of the largest mutual fund and financial services groups in the world. It was founded in 1946 and serves North American investors. Fidelity Ventures is its venture capital arm...
and investment # 2 with Mackenzie Financial, this would result in the individual having two separate RRSP accounts held with two different companies.
The main benefit of client-held accounts is that they do not generally incur annual fees. The main detriment is that investors must keep track of each RRSP investment made with each separate company.
Nominee accounts
Nominee accounts are so named because individuals with this type of account nominate a nominee, usually one of Canada's five major banks or a major investment dealer, to hold a number of different investments in a single account. For example, if an individual buys investment # 1 with Fidelity InvestmentsFidelity Investments
FMR LLC or Fidelity Investments is an American multinational financial services corporation one of the largest mutual fund and financial services groups in the world. It was founded in 1946 and serves North American investors. Fidelity Ventures is its venture capital arm...
and investment #2 with Mackenzie Financial, both investments are held in a single RRSP account with the nominee, Royal Bank.
The main benefit of a nominee account is the ability to keep track of all RRSP investments within a single account. The main detriment is that nominee accounts often incur annual fees.
A "self-directed" RRSP (SDRSP) is a special kind of nominee account. It is essentially a trading account at a brokerage that has tax-sheltered status. The holder of a self-directed RRSP instructs the brokerage to buy and sell securities on their behalf as with any brokerage account. The reason that it's described as "self-directed" is that the holder of this kind of RRSP directs all the investment decisions themselves, and does not normally have the service of an investment advisor.
Intermediary accounts
Intermediary accounts are essentially identical in function to Nominee accounts. The reason an investor would have an Intermediary account instead of a Nominee account has to do with the investment advisor they deal with. If the advisor is not aligned with a major bank or investment dealer, they may not have the logistical ability to offer nominee accounts to their clients.As a result, the advisor will approach an intermediary company which is able to offer the investor identical benefits as those offered by a nominee account. The three main Canadian companies who offer intermediary services are B2B Trust
B2B Trust
B2B Trust is a federally chartered Canadian trust company that manufactures products for distribution through Independent Financial Advisers. It does not distribute products directly to the public.-History:...
, M.R.S. Trust, and Canadian Western Trust (CWT).
The main benefits and detriments of Intermediary accounts are identical as those offered by Nominee accounts.
Similar schemes in other countries
- Individual Retirement AccountIndividual Retirement AccountAn individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
and 401(k)401(k)A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
(United StatesUnited StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
) - Superannuation in AustraliaSuperannuation in AustraliaSuperannuation is a retirement program in Australia. It has a compulsory element whereby employers are required by law to pay an additional amount based on a proportion of an employee's salaries and wages into a complying superannuation fund.An individual's superannuation fund can be accessed...
- Individual Savings AccountIndividual Savings AccountAn Individual Savings Account is a financial product available to residents in the United Kingdom. It is designed for the purpose of investment and savings with a favourable tax status. Money is contributed from after tax income and not subjected to income tax or capital gains tax within a holding...
(ISA) (United KingdomUnited KingdomThe United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
)
See also
- Retirement Compensation ArrangementsRetirement Compensation ArrangementsRetirement Compensation Arrangements are defined under subsection 248 of the Canadian Income Tax Act, which allows 100 per cent tax-deductible corporate dollars to be deposited into an RCA, on behalf of the private business owner and/or key employee. No tax is paid by the owner/employee until...
(RCA) - Retirement plan
- Registered Retirement Income FundRegistered Retirement Income FundA Registered Retirement Income Fund or RRIF is a tax-deferred retirement plan under Canadian tax law. Individuals use an RRIF to generate income from the savings accumulated under their Registered Retirement Savings Plan...
(RRIF) - Saskatchewan Pension PlanSaskatchewan Pension PlanThe Saskatchewan Pension Plan is a voluntary money purchase defined contribution pension plan created by the Government of Saskatchewan. The SPP was created through The Saskatchewan Pension Plan Act . Oversight of the plan rests with the Saskatchewan Pension Plan Board of Trustees. The plan is...
- Locked-In Retirement AccountLocked-In Retirement AccountA Locked-In Retirement Account ', and the virtually identical Locked-in Retirement Savings Plan ', are Canadian investment accounts designed specifically to hold locked-in pension funds for former plan members, former spouses or common-law partners, or surviving spouses or partners...
(LIRA) - Locked-in Retirement Savings PlanLocked-In Retirement AccountA Locked-In Retirement Account ', and the virtually identical Locked-in Retirement Savings Plan ', are Canadian investment accounts designed specifically to hold locked-in pension funds for former plan members, former spouses or common-law partners, or surviving spouses or partners...
(LRSP) - Life Income FundsLocked-In Retirement AccountA Locked-In Retirement Account ', and the virtually identical Locked-in Retirement Savings Plan ', are Canadian investment accounts designed specifically to hold locked-in pension funds for former plan members, former spouses or common-law partners, or surviving spouses or partners...
(LIF) - Locked-In Retirement Income FundsLocked-In Retirement AccountA Locked-In Retirement Account ', and the virtually identical Locked-in Retirement Savings Plan ', are Canadian investment accounts designed specifically to hold locked-in pension funds for former plan members, former spouses or common-law partners, or surviving spouses or partners...
(LRIF) - Registered Education Savings PlanRegistered Education Savings PlanA Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children's post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant and a source of tax-deferred income.-Tax Benefits:An RESP...
(RESP) - Prescribed Retirement Income FundLocked-In Retirement AccountA Locked-In Retirement Account ', and the virtually identical Locked-in Retirement Savings Plan ', are Canadian investment accounts designed specifically to hold locked-in pension funds for former plan members, former spouses or common-law partners, or surviving spouses or partners...
(PRIF) - Taxation in CanadaTaxation in CanadaThe level of Taxation in Canada is average among Organisation for Economic Co-operation and Development countries.-Administration:...
- Tax-Free Savings AccountTax-Free Savings AccountThe Tax-Free Savings Account is an account that provides tax benefits for saving in Canada. Contributions to a TFSA are not deductible for income tax purposes. Investment income, including capital gains, earned in a TFSA is not taxed, even when withdrawn.-History:It was introduced by Jim...
(TFSA)