Registered Retirement Savings Plans

Registered Retirement Savings Plans (RRSPs)

Registered retirement savings plans are established by individuals to save for their retirements. They are tax sheltered, which means that the contributions are not taxed as part of income. The individual sets up an account which is a trusteed fund (held independently) with a bank, trust company or insurance company. The contributions that are made are put in an investment option chosen by the individual. Investment earnings inside the plan are not taxed, but must be used to purchase an annuity or retirement income fund by age 69.

RRSP's were created in 1957 even before we had a public pension plan. Even back then the intent of the registered retirement savings plan was to be the "foundation" or "pillar" of one's retirement planning. The idea was to encourage saving by letting you put off paying taxes on those savings until you retire - a time when most people are in a lower tax bracket than during their working years.

Who can have an RRSP?

Anyone who earns income can have an RRSP until the end of the year in which one turns age 69. You can also continue to contribute to a spouse's RRSP until that spouse turns 69 regardless of your age. There is no minimum age for contributing to an RRSP, so long as you earn income. (Because the wonderful process of compounding interest takes place within the RRSP, the earlier in one's "earning" career RRSP contributions begin, the faster the principal will grow.)

How much money can be put into the plan?

The amount you may contribute each year to your RRSP is restricted. Contributions for the present year are based on your earned income of the previous year. With present legislation, contributions are 18% of your previous year's earned income up to a maximum of $13,500. There had been plans to increase that limit but it looks like those plans have been put on hold until at least yr.2004. If you have a company pension plan then a pension adjustment is also made before determining your maximum allowable RRSP contribution for the year. (When you receive your tax assessment from Revenue Canada, take note of your maximum allowable RRSP contribution.)

What happens is I contribute too much?

Overcontributions up to $2000 over the life of the RRSP are allowed without penalty. However, if at any time you have gone over the $2000 overcontribution limit, Revenue Canada will penalize you 1% each month until the extra contributions have been removed form the plan.

Although these overcontributions are not tax-deductable, they can compound tax-free within the plan. It should also be noted that children under eighteen at the beginning of the year cannot make the overcontribution.

What if I just don't have the cash to make a contribution one year?

If you find yourself short of extra cash to make a contribution one year, don't despair. Although previously there was a restriction limiting the ability to carryforward missed contributions for only seven years, that has changed. Now it is unlimited how long you may carryforward missed contributions. However, although you may still have the opportunity to catch up on missed contributions, you will have a hard time catching up on the missed "time-value" of money invested.

Where can I learn more about RRSPs?

Read, read and then read some more. Your local library or favourite bookstore have numerous worthwhile books on the subject. If you feel you don't have the time or the inclination to do some research yourself, get some referrals from people you trust for names of financial advisors.

A Registered Retirement Savings Plan is a worthwhile savings vehicle, and wise investing and saving early on will help to make retirement a reality and not just a pipe-dream!