The earlier we start to think about saving for our retirement years, the better. From pension plans, to TFSAs to conventional investing, there are many ways to contribute to your nest egg. Today we focus on RRSP basics, what they are, how they can help maximize savings and how to avoid unsafe RRSP investments.
What exactly is an RRSP?
The Registered Retirement Savings Plan (RRSP) was introduced in 1965 to assist Canadians with saving for retirement. Plainly, RRSPs are retirement savings accounts, registered with the federal government with certain tax-deferring characteristics. You can contribute to an RRSP over your working lifetime.
An RRSP is not an investment in itself, it consists of a packaged set of securities and can be built using a number of different types of CRA-qualified investments including mutual funds, exchange-traded funds (ETFs), Guaranteed Investment Certificates (GICs), Canada Savings Bonds, stocks, mortgage-backed securities and more.
Are there different types of RRSPs?
Yes, you can open an individual, spousal or a group plan.
An individual RRSP is a plan that you open for yourself that is registered in your name. The investments and tax advantages of the RRSP belong to you.
A spousal RRSP is registered in your spouse or common law partner’s name. They own the investments in the RRSP, but you contribute to it and receive a tax deduction for any contributions you make. Spousal RRSPs are used to equalize retirement income and minimize tax.
Lastly, a group RRSP is offered by some employers to help employees save for retirement. It is identical to an individual RRSP, but your employer sets it up and the contributions typically come from payroll deductions. You and/or your employer can make contributions and the contributions are tax-deductible.
How do I open an RRSP account?
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. You can open an RRSP account through a bank, trust company, credit union, mutual fund company, investment firm or even a life insurance company. Like any other type of investment, it’s important to research the firm and the individual providing the services before deciding to invest.
To open an RRSP account, you would generally either make a contribution, or transfer money from another RRSP. You can also set up regular contributions through a pre-authorized debit, pre-authorized contribution or a payroll savings plan, instead of making your annual contribution all at once.
How much can I contribute each year?
There are limits to how much you can put into an RRSP each year. You are able to contribute the lower of 18 per cent of your earned income in the previous year or less than the defined maximum contribution amount for the current tax year ($25,370 for 2016).
If you belong to a pension plan, your pension adjustment may reduce the amount you can contribute to an RRSP yearly.
What are the tax-deferring benefits associated with RRSPs?
You claim your RRSP contribution as a deduction against your income on your tax return. However, you need not claim any or all of the amount of your contribution in the tax year in which you made the contribution. For example, if your income is lower during a certain year, you can carry forward the deduction for your contribution to a future year when your income might be higher. That way, your tax savings will be greater because you're in a higher tax bracket.
In addition, you won't pay any tax on investment earnings as long as they stay in your RRSP.
You can borrow from your RRSP to buy your first home or pay for your education. Under the Home Buyer’s Plan you can take out up to $25,000 to fund a down payment on your first home. You can also use up to $20,000 to pay education costs for yourself or your spouse under the Lifelong Learning Plan (LLP). You won't be taxed on these withdrawals as long as you pay the borrowed money back within specified time periods.
Are RRSPs safe from investment fraud?
Again, RRSPs are packages of investments designed to help you save for retirement. The quality of the investments you choose to put into your RRSP account is important. Like any other investment decision, it’s essential to conduct independent, unbiased research on the firm or individual offering the investment as well as on the investments themselves.
RRSP accounts are not out of bounds for fraudsters. Commonly, they prey on individuals who may need early access to their RRSP funds and promise them this access “tax free” or offer a “loan” if their RRSP is locked in. They also convince individuals to divert their RRSP funds to purchase shares in a fraudulent company. In most cases, the victim is required to pay a fee to the fraudster, ends up owing taxes for withdrawing funds from their RRSP and loses a chunk of, or all of, their savings in the account.
What do I need to consider when choosing investments for my RRSPs?
Balance and diversification - no single investment can be a top performer all the time and in all economic environments. Investors who diversify are less likely to lose everything due to a downturn. Diversifying the types of investments that make up your RRSP account is also a good practice. Depending on your investment objectives, mixing safe investments (like bonds) and riskier investments (such as stocks) can help create more consistent returns over the long-term.
Risk tolerance – your risk profile is dependent on multiple factors such as your investment goals, personality and life objectives. Because saving for retirement is typically a long-term goal, you may be more willing to take on riskier investments in earlier years, when there is time to recover if something does go wrong. By the same logic, most people prefer safer investments as they near retirement. It’s important to make sure each investment matches your risk tolerance and that you periodically review and re-evaluate your strategies and portfolio, especially when there has been a change in your financial circumstances or if significant life events occur.
Time horizon – age is an important consideration when building an RRSP account and choosing investments. Did you open the account at an early age? Do you plan to max out your contributions each year? Will you withdraw money from your RRSP at any point? What age do you plan to retire? How much time do you have left? Choose investments that make sense with the timeline you’re working with. Keep in mind that you are required to close your RRSP when you turn 71; build a plan with all these considerations in mind.
Due diligence – Conduct thorough research on each investment within your RRSP account, including relevant registration or enforcement history checks, as well as reading news releases or online reports. In some cases, it may also be best to consult a professional, unbiased third party such as a lawyer or accountant for a second opinion on a particular investment or on your RRSP account as a whole.
What are some ways that help me preserve my nest egg?
Remember to check on your account regularly, open and read statements when you get them and keep an eye open for any unauthorized activity.
If you discover any discrepancies with your RRSP account, or you’ve been approached or fallen victim to an RRSP scam, contact us at firstname.lastname@example.org or (877) 355-4488.
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This blog is for general information purposes only and does not constitute legal or other professional advice. You should obtain independent professional or independent legal advice prior to acting on information in this blog or if you have questions about your particular circumstances.