Your RRSP Guide 2011-12

The Canadian government regulates the Registered Retirement Savings Plan (RRSP) program, allowing it to have special tax benefits as you save for your retirement. Annual RRSP contributions can reduce the amount of income tax you pay in the year of your contribution. These monies invested annually grow on a tax-deferred basis, and tax is only paid at the time of withdrawal.

RRSPs are arguably the easiest and most efficient way for Canadians to benefit by reducing their income tax payable, and at the same time helping them save for retirement.

Who can contribute to an RRSP? All Canadian taxpayers with "earned income" in the previous tax year, or those having unused contributions carried forward from previous years can contribute to their RRSP. A person is eligible to make contributions to their RRSP until December 31 in the year they reach age 71.

How much can I contribute? Revenue Canada establishes guidelines for the minimum and maximum overall yearly amount a person is eligible to contribute to their RRSP.

The basic formula used to determine a taxpayers eligible contribution is as follows:

18% of earned income minus any Pension Adjustment = eligible contribution amount.

When determining the maximum eligible contribution, Revenue Canada applies a ceiling to contribution limits as outlined in the table below. For those who are uncertain as to their current year's contribution limit, they can always refer to their Notice of Assessment from CRA. 

What is the RRSP contribution deadline? February 29, 2012, is the deadline for contributing to an RRSP for the 2011 tax year. December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP.

Note: The Income Tax Act sets the deadline as "on or before the day that is 60 days after the end of the year", which is March 1st except in a leap year, when it will be February 29th.

Can RRSPs help you to buy a first home? If you are buying a home for the first time, there are advantages to the RRSP Home Buyers' Plan (HBP). It lets the first time buyer withdraw up to $25,000 from RRSPs for a home purchase, which must be repaid within 15 years, subject to a minimum annual repayment of 1/15 of the amount. Any yearly minimum balance not repaid is added to the taxpayer's income for that year.

RRSPs can help you pursue your education! If you want to pursue an education, the Lifelong Learning Plan (LLP) lets you withdraw amounts from your RRSP to finance eligible training or education for you, your spouse or your common-law partner. The withdrawn amount does not have to be included in your income, and there is no withholding tax. Using the LLP, you can withdraw up to $10,000 each year for qualified education expenses, with a maximum lifetime withdrawal amount of $20,000 over a four year period.

These withdrawals must be repaid to your RRSP over a period up to 10 years. Any amount not repaid within 10 years will be included in your income for the year it was due.

Why is it important to save for Retirement? If you earn taxable income, whether employed, self-employed, receive net rental income, or maintenance and alimony payments, and are 71 years of age or younger, you can build a substantial retirement income while paying less tax now by contributing regularly to an RRSP.

An RRSP can give you the financial resources you need for a comfortable retirement that will meet your lifestyle requirements. The following are notable benefits to an RRSP:

• Your contributions are tax-deductible: You can reduce your income tax payable by one dollar per dollar contributed, in the tax year you contribute. For example, if your marginal tax rate is 40% and you contribute $10,000 to your RRSP, your taxable income will be reduced by $10,000 for a tax-return saving of approximately $4,000.
• The investment income is tax-deferred: Income that you earn in your RRSP investment is tax-deferred for the life of the plan. This means that you do not pay taxes on income earned in an RRSP until you withdraw the funds, enabling RRSP savings to grow much faster without taxation reducing the growth.
• Accessing your RRSP funds prior to retirement: Money you invest in an RRSP is just as accessible if opportunities arise, or for emergency use (though applicable withholding tax would be due).