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Investing & Retirement - RRSPs
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1. What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a government approved plan through which you save money for your retirement years. Your contributions, within limits, are tax deductible, and the income earned is tax sheltered. Tax sheltered means that your investments are not taxed until withdrawn at retirement. You can have any number of plans.
With an RRSP you are investing money when you can afford it during your peak years - to build up a comfortable retirement fund. Not only are you investing money that would otherwise be paid in taxes, but the earnings of your plan will not be taxed until you withdraw them at retirement, and by then you will be in a lower tax bracket. Since 100% of these earnings can be reinvested and compounded, the growth of your RRSP increases rapidly over the years.
For more information on OMISTA Credit Unions' RRSPs please visit our RRSP section or Contact an OMISTA expert and take ownership of your future with an RRSP plan that's as unique as you are, or, our Credential Financial Strategies Inc . Representative, Investment Specialist, Ozzie MacKay.
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2. What is compound interest?
While your RRSPs sit in your investments portfolio they accumulate value and compound the growth of your savings through compound interest. This means your money works for you by earning interest on top of interest. The sooner you begin to invest the more compounded interest you'll earn in your lifetime.
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3. What happens at retirement?
The first stage of an RRSP is to accumulate retirement savings. Regular contributions to an RRSP will result in a substantial accumulation of savings. When you desire income from your retirement savings, you need to invest/transfer your money in one or more of three retirement income options. You can have any number of each option.
- Registered Retired Income Fund (RRIF)
- Term Certain Annuity to Age 90 (TCA 90)
- Life Annuity
- Variable Benefit (VB) from a Money Purchase Pension Plan
RRIFs, life annuitties and VBs provide an income that can last for the lifetime of you or your spouse/common-law partner. TCA 90s last until you or your younger spouse turn 90.
Only the retirement income payments are taxed each year as you receive them , thus spreading the taxation of your accumulated savings over your retirement years.
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4. Who is eligible to contribute?
RRSPs are available to any income earner subject to Canadian taxation, including non-residents, providing they are less than 71 years of age in the year the tax deduction is to be made.
- Maximum contribution as set by CRA
- Contributions are tax deductible and earned income is tax sheltered
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5. Why contribute to an RRSP?
Most people know that with an RRSP you can save on taxes, however there are many other benefits of RRSPs you should consider when making your decision of whether or not you'll contribute.
- Immediate tax savings: get a break on your taxes, after all it is your money, you earned it. RRSPs are tax deductable; they reduce the amount of taxes you owe by lowering your Gross Annual Income. Making RRSP contributions allow you to reduce the amount of taxes you pay each year and empowers you to save more sooner.
- Tax-deferred compounding: since your RRSPs are not taxed until withdrawn, they grow in a tax sheltered environment. This allows the value of your RRSP investments to grow protected from taxes.
- Compound interest: while your RRSPs sit in your investments portfolio they accumulate value and compound the growth of your savings through compound interest. This means your money works for you by earning interest on top of interest. The sooner you begin to invest the more compounded interest you'll earn in your lifetime.
- Build your retirement nest egg: during your peak earning years, you have more money to invest in your future. This is the best time to begin building your retirement nest egg by investing in RRSPs. Not only are you more able to afford RRSPs during your peek years, but the funds you invest now for your future will earn you more in the long run with the magic of compound interest.
- Home Buyer's Plan: once you're ready to invest in purchasing your first home it is a wonderful, but most often financially difficult time. With RRSPs you can withdraw up to $20,000 from your RRSP, without penalty or tax, to be applied to the purchase of your first home. You then have 15 years to repay your RRSP.
- Life Long Learning Plan: if you're considering upgrading your education to invest in a brighter future, RRSPs can ease your financial stress. You can use up to $20,000 of your RRSP to pay for your own or your partner’s education. Keep in mind, the withdrawal is tax-free and can be paid back to your RRSPs over ten years. Just enough time for you to finish your higher learning and begin your bright new career!
- Emergency funds: at times of lower-income earnings RRSPs can be used to bridge the low-income years when taking maternity or parental leave, or when making a career change. However, please keep in mind there are tax consequences. Withdrawals are considered taxable income.
- Income Splitting: If one spouse/common-law partner will be in a higher tax bracket after retirement, as much of the RRSP contributions as possible should be accumulated in the name of the spouse/common-law partner who will be in the lower tax bracket. By doing so you can take advantage of a lower tax rate and the compounded interest accumulated on the combined savings.
- Retirement tax savings: once you are ready to withdraw funds for your retirement, you will likely be in a lower income tax bracket than when you were working. This allows you to save on taxes and enjoy more of the money you invested for your future.
- Peace of mind: after retirement your lifestyle endures a significant income level change. An RRSP can be used to supplement your retirement income by "topping off" your pension. Empowering you to maintain your lifestyle and do the things you love.
One of the best reasons to begin your RRSP contributions early in your career is to take advantage of the long-term benefit of compound interest, interest earned on top of interest. You could earn more funds in the long run by investing smaller amounts today vs. having to invest larger amounts later on in life.
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6. Are my RRSP investments protected?
Your deposits are 100% protected and insured through The New Brunswick Credit Union Deposit Insurance Corporation (NBCUDIC) That's peace of mind you can count on as you set your retirement goals and watch them become reality at OMISTA. A peace of mind only offered within the Credit Union system.
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7. What is my RRSP deduction limit?
Your Notice of Assessment from CRA, received after filing your tax return, will state your RRSP deduction limit for the following year. At certain times of the year, you can also phone the CRA TIPS line listed in your telephone directory to confirm your deduction limit. The calculation of the amount will depend on whether you are a member of a pension plan, and if you are, the type of pension plan.
NOTE: The amount of RRSP contributions you can deduct from your income ("RRSP deduction limit") may be less than the amount you can contribute. Employer contributions made to an RRSP on your behalf form part of your RRSP contribution.
Click below for a RRSP Deduction Limit Form. You may need to instal Adobe Acrobat Reader.
Calculation of RRSP Deduction Limit
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8. What is my maximum deduction for the year?
The maximum RRSP contribution you may deduct for the current year is:
18% of your earned income for the prior year, up to the maximum amount for the current year; MINUS your "Pension Adjustment" (PA)* for the prior year and "Past Service Pension Adjustment" (PSPA)** PLUS your "Pension Adjustment Reversal" (PAR)***
The present maximum amounts are****:
|
Year |
Maximum Contribution |
Earned Income
(in prior year)
for maximum |
| 2005 |
$ 16 500 |
$ 91 666 |
| 2006 |
$ 18 000 |
$ 100 000 |
| 2007 |
$ 19 000 |
$ 105 556 |
| 2008 |
$ 20 000 |
$ 111 111 |
| 2009 |
$ 21 000 |
$ 116 667 |
| 2010 |
$ 22 000 |
$122 222 |
To calculate your RRSP deduction limit for the upcoming tax season you can click here to print an unofficial form. This form is intended for personal use only and cannot be submitted with your taxes as an official government RRSP Deduction form.
*Your PA for the prior year should be on your T4 slips for that year. It reflects the value of future benefits arising from membership in a registered pension plan (RPP) or deferred profit sharing plan (DPSP). If you were not a member of a RPP or DPSP in the prior year, your PA is zero. If you were a member of a "money purchase" RPP or a DPSP, the PA is the total contributions to the RPP or DPSP in respect to the prior year by you, or on your behalf by your employer, union, etc. If you were a member of a "defined benefit" RPP, the PA is determined by a complex formula. You may wish to ask your employer how it is calculated.
**Effective 2001, "uncertified PSPA", or an upgrade to a pension plan, affects RRSP deduction limits for the following year. "Certified PSPA", or a pension buyback for an individual, affects the year of buybackor the year the information is sent to the CRA.
***A Pension Adjustment Reversal (PAR) may arise if you are a member of a defined benefit RPP and the pension is not vested when you terminate your employment.
****After 2010 this amount will be indexed by the average increase in industrial wages as published by Statistics Canada.
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9. Can I carry foward unused deduction room?
Yes, if you don't claim your maximum RRSP deduction, you can carry forward the unused deduction room indefinetly. This applies to whether or not you actually manke a contribution. Your Notice of Assessment from CRA records any cumulative deduction room in determining your maximum RRSP deduction for the current year.
If you don't have the cash to contribute now, you can make larger catch up contributions in future years when you have the cash available. But remember, you maximize your retirement savings by making each RRSP contribution as early as possible.
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10. Can I carry foward undeducted contributions?
If you have the cash to contribute now, but expect your income to be taxed at a higher rate in the future, you can contribute now and claim the deduction in a future year or years. This strategy is not penalized as an over-contribution as long as your contributions are within your deduction room. And it has the advantage of tax-sheltering the earnings on your contribution. The official tax receipt should be filed with your tax return in the year of contribution, even if not deducted, and the amount reported on Schedule 7 of your tax return.
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11. What is my RRSP contribution deadline?
You may contribute any time during the year. Contributions made during the first 60 days, March 1st, of any year may be deducted for the current or the immediatly preceding taxation year. CRA has confirmed that if the last day of the 60-day period falls on a Saturday or Sunday, the deadline will be extended to the following Monday.
If you are contributing by mail, your application and/or deposit must be received by the plan issuer on or before the contribution deadline. To be certain your contribution will make the deadline, visit any of our three branches to speak to an OMISTA financial expert.
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12. What are over-contributions?
Over-contributions are contributions that exceed your deduction room. An over-contribution of up to $2000 can be made by an individual who was 18 years of age or over in the prior year, and can be carried forward indefinitely.
If you make contributions which increase your over-contribution above $2000, you will pay a 1% penalty tax per month on the amount in excess of $2000.
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13. Can I borrow for an RRSP?
Yes, but you cannot deduct interest on money you borrow to contribute to an RRSP. OMISTA Credit Union offers owners the ability to borrow for an RRSP with our "Take 10 Contribution Room Loan".
With an OMISTA RRSP "Take 10" Contribution Room Loan you can:
- take advantage of unused carry forward amounts or maximize your yearly contributions
- receive a potentially larger income tax refund since contributions are tax-deductible
- reduce your loan by applying your larger refund to the principle
- spread payments over up to 10 years
- see your savings grow tax-free and earn compound interest inside the plan
- take comfort in financial security at retirement
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14. Will I receive an official receipt?
After your RRSP contribution has been processd by the RRSP issuer, OMISTA, you will receive an official receipt in the mail. This must be filed with your tax return for that year even if you choose not to deduct it until a later year. Financial institutions are required to report all RRSP contributitions to the CRA.
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15. Who sells RRSPs?
Credit Unions, trust companies, life insurance, mutual fund companies, banks and investment dealers all sell RRSPs. While all RRSPs provide the same tax deduction, not all plans are the same. Each issuer offers one or more ways to invest your money, and the growth rates, terms, conditions and fees vary.
We would be happy to provide financial guidance. You can meet with our investment professionals at any of our three branches or, your Credential Financial Strategies Inc. Representative, Investment Specialist, Ozzie MacKay.
You can also click here to access our on-line financial planning tool.
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16. What does an RRSP cost?
Always be sure to ask about fees before deciding on an RRSP. Not all issuers charge fees, but many do. OMISTA Credit Union does not charge fees on any of our RRSPs. The only time you may be charged a fee on an RRSP would be if you were to transfer your RRSP from OMISTA to another Financial Institution, in that situation there would be a $25.00 administration charge.
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17. What should I look for in an RRSP?
Look for the plan that has the best potential return for the risk you are prepared to take. If there are fees involved, take them into account in comparing the anticipated annual growth.
If for any reason you prefer a short term investment, make sure that your plan can be terminated quickly and at little or no cost. To compare the earnings on guaranteed type RRSPs, don't look just at interest rates. Ask for the net annual yield.
The more you know before you invest, the better. Visit any of our three branches to speak to an OMISTA financial expert. Together we'll look at your individual situation, including major financial objectives, and devise a plan to empower you to achieve financial wellbeing now and in retirement. Contact an OMISTA expert and take ownership of your future with an RRSP plan that's as unique as you are, or, your Credential Financial Strategies Inc. Representative, Investment Specialist, Ozzie MacKay.
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18. When is the best time to start investing in RRSPs?
The best time to start investing in your RRSPs is as early as possible. If you wait until your 40’s to start investing you’ll need to save thousands more each year just to achieve the same results as if you’d started in your 20’s.
One of the best reasons to begin your RRSP contributions early in your career is to take advantage of the long-term benefit of compound interest, interest earned on top of interest. You could earn more funds in the long run by investing smaller amounts today vs. having to invest larger amounts later on in life.
Contact an OMISTA expert and take ownership of your future by taking control of your savings today. After all, it’s your money.
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19. What is the definition of a Spouse or Common-law Partner?
As of 2001, income tax legislation defines the term "spouse" to be a person of the opposite sex who is party to a legal marriage. As well, the term "common-law partner" has been introduced and is defined as two persons, regardless of sex, who cohabit in a conjugal relationship and who have cohabited throughout the 12 month period that ends at that time. This period can be less than 12 months if both partners are the natural or adoptive parents of the same child, or if one common-law partner has a child who is wholly dependent on the other for support and over whom the other has custody. The term "common-law partner" does not apply if at the particular time the individuals were seperated for 90 days or more dues to a breakdown of the conjugal relationship.
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20. What is earned income?
Your RRSP deduction is based on your prior year's earned income. The following qualify as earned income:
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salary, wages, bonuses and taxable fringe benefits (minus union or professional dues and employment expenses claimed as deductions)
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taxable wage loss replacement or long term disability income resulting from employment
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Canada pension plan disability benefits
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net income from self-employment (minus current year business losses)
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net rental income from real estate (minus current year rental losses)
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taxable alimony or maintenance payments received
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royalties of an author or inventor
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net research grants
NOTES:
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Earned income must be reduced by deductible alimony or maintenance payments.
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Interest, dividend, capital gains income, and E.I. benefits, do not qualify as earned income.
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Income in which is not taxed, such as Workers' Compensation and welfare benefits, cannot be used as earned income.
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21. What happens in the event of my death?
If your spouse/common-law partner is the beneficiary of your RRSP, or inherits these amounts under your Will, the proceeds can be transferred to an RRSP, RRIF, or annuityfor your spouse/common-law partner. He or she will not have to pay tax on the funds until they are withdrawn. If your spouse is over 71, he or she can use all or part of the funds to purchase a retirement income option.
If your beneficiary is a child or grandchild who was financially dependent on you, there are a number of options available for continued tax sheltering. Please contact an OMISTA expert for further details.
In all other circumstances, your RRSP funds are taxed on your final tax return. The result is the same as if you had withdrawn your RRSP immediatly before your death.
If a registered charity is the designated beneficiary of the RRSP in the plan or the Will, the charitable donations tax credit can be extended to the estate. This extension is retroactive to deaths that occured in 1999.
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22. Can I still contribute after death?
Following your death, your legal representative can arrange contributions to RRSPs for your spouse/common-law partner, and deduct those amounts on your final tax return. This applies to contributions for the year of death made within your RRSP deduction limit. The contributions must be made within 60 days after the end of the calendar year of your death.
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23. Who is the Named Beneficiary?
The named beneficiary is individual who is eligible to receive the Retirement Income Payments from the plan in the event of your death.
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Credential Financial Strategies Inc. is a member company under Credential Financial Inc., offering financial planning, life insurance and investments to members of credit unions and their communities. Credential® is a registered mark owned by Credential Financial Inc. and is used under licence.
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