Registered Savings Plans
from Ralph Vandervoort
Registered Retirement Savings Plans (RRSP)
An RRSP is a contract registered with the Minister of National Revenue and issued by an authorized institution, which provides you a tax shelter and the incentive to save money for your retirement years. Within certain limits you can claim deductions on contributions to your or your spouse's RRSP. When the funds are withdrawn they are then included in your or your spouse's income. Currently you must start receiving funds no later than the year you turn 71. Funds may be used to purchase a life annuity or a RRIF, or even cashed out and tax paid at current tax rates.
Investments meeting certain requirements are eligible for your RRSP such as GIC'S, some stocks, bonds, and investment or segregated funds. Proper planning is needed in selecting the appropriate investment vehicle. There is no minimum age to establish an RRSP. Even young children may contribute as long as they have qualified income and a Social Insurance Number. Contributions in the first 60 days of the year can either be used for the current year, or the previous year. . On the previous year Notice Of Assessment the contribution limit is displayed. Over contributions of up to $2,000 are allowed, but no deduction is obtained. Contributions over this amount attract a 1% per month penalty.
The maximum contribution limit for 2018 is $26,230 plus any unused contribution room from previous years. Transfers may be made directly between financial institutions with no tax implications for the individual. 2019 maximum contribution is $26,500.
Independent brokers such as us have flexible investment options with many institutions.
See Government of Canada website
Registered Education Savings Plans (RESP)
Human Resources Development Canada (HRDC) who administer the Canada Education Savings Grant program on behalf of the Federal Government require each subscriber of an RESP to apply in writing for the 20% grant; this is normally done for you at the time the RESP is opened by the investing institution. RESP funds can be invested in many ways; the most common is in mutual funds. There is no foreign content limit as with RRSP’S. The beneficiary must have a social insurance number to obtain the grant.
The maximum annual grant per child is $500 achieved by investing $2500, giving a total $3000 invested that year. Although there is no annual maximum contribution, the grant is only available based on the annual maximum of $2,500 and for children under 17 years of age even though the account can remain open for up to 36 years. The lifetime maximum is $50,000. The child may only receive the assets while enrolled at a qualifying post secondary institution. If the child does not attend such an institution the grant is returned to the HRDC, the contributors original deposit refunded to the contributor tax free, the interest on the original deposit (max. $50,000) can be rolled to the contributor’s RRSP providing there is contribution room.
When should I start one? Now, the earlier you start the greater your saving. Parents, guardians, grandparents, other friends or relatives can all open one for your child.
The Government of Canada website provides further information
Tax Free Savings Account (TFSA)
These accounts were introduced by the federal government effective January 1, 2009, allowing those 18 years of age or older to deposit up to $5,000 annually into a TFSA and have all returns tax free. As of 2013 and 2014 this was increased to $5,500 annually and in 2015 increased to $10,000 annually. Effective 2016 the contribution limit was reduced back to $5,500 annually. This amount is to be indexed to inflation and rounded to the nearest $500. 2017 and 2018 limits were $5,500, increasing to $6,000 for 2019. To check your current eligibility for contributions, you may contact the TIPS line at 800-267-6999.
You can withdraw funds whenever you want and pay no tax on gains in the contract. These will not affect any income tested benefits or credits. Unused contribution room is carried forward indefinitely and eligible investments are similar to RRSP. I'm often asked which is better, a TFSA or an RRSP? The answer depends upon two things, your current tax bracket and your tax bracket at retirement! A high tax bracket now and a low one at retirement favours an RRSP, while a low bracket now favours a TFSA. However those with no RRSP contribution room should consider a TFSA for investments.
See Government of Canada Website, and for a TFSA Calculator.
See also CI Investments' TFSA versus RRSP Calculator, to see how your marginal tax rate affects the growth of your TFSA and RRSP.