This year’s Registered Retirement Savings Plan (RRSP) contribution deadline is less than a month away. If that raises your anxiety level — even a smidge — well, welcome to adulthood. The truth is, RRSP season is nothing to worry about. And while I know you get that, you probably have friends and family members who struggle with retirement planning.
This post is for them; please forward it.
- An RRSP is a plan, not an investment. If you haven’t done so already, visit your choice of financial institution (bank, credit union, insurance company or trust company) and they will set one up for you. They’ll also present you with investment options that you can hold inside your plan. It’s a good idea to consult a financial advisor about this. He or she can help you decide what kind of investment mix and savings rate is right for you.
- This year’s deadline is March 3. The deadline is insignificant from a retirement planning perspective. It does, however, have tax implications. Funds invested by midnight on the 3rd can be claimed for tax purposes in your 2013 return. (That’s midnight as in the end of the 3rd, not the beginning.)
- A lot of investors choose to make regular contributions throughout the year. The benefit of that is referred to as dollar-cost averaging. Say you decide to save $300 per month. When stock and bond prices are high, that contribution buys you less. When they’re low, it buys you more. Dollar-cost averaging takes market timing out of the equation. It also has the added benefit of making saving automatic.
- There is a limit to the amount you can save each year, because there’s a tax benefit associated with RRSP investments. The limit for the 2013 tax year is 18% of the income you earned in 2012, up to a maximum of $23,820. Then things get a bit complicated. There are two more possible steps: 1) If you’re a member of a workplace pension plan, you have what’s called a pension adjustment (PA) amount. Subtract that from your 18% calculation. You can find your PA amount on your T4. 2) If you haven’t maximized your RRSP contribution in previous years, some of that amount — referred to as contribution room — can be applied this year. You can apply contribution room from as far back as 1993. If you don’t have an advisor to help you with all this, check the Notice of Assessment you received from the Canada Revenue Agency last year (line A of the RRSP Deduction Limit Statement). You can also check the T1028 (called Your RRSP information for 2012) the government sent you after processing your tax return last year. Or you can call the agency’s Tax Information Phone Service at 1-800-267-6999.
- You can continue making RRSP contributions until you’re 71. The final deadline is December 31 of the year you turn 71. At that point you have a number of options. 1) Withdraw your funds. You’ll take a tax hit if you do so; an amount will be deducted from your pay-out by your financial institution. 2) Transfer your funds to a Registered Retirement Income Fund. 3) Purchase an annuity with your funds.
- An individual RRSP is one you’ve contributed to for your own retirement savings. You can also set up a spousal or common-law partner RRSP. You still get the money when you’re 71, but between now and then your spouse or partner can make contributions. If he or she is younger than you, you can continue making contributions to a spousal plan until Dec. 31 of the year he or she turns 71.
- In some cases, you can withdraw money from an RRSP before retirement. Again though, there will be tax due on the amount you take out so tread carefully. Your financial institution will withhold a percentage of your withdrawal to offset a portion of the tax you will owe in the year you’ve taken the money out. Ten per cent is withheld on amounts up to $5,000 (5% in Quebec); 20% is withheld on amounts over $5,000 and up to $15,000 (10% in Quebec); and 30% is withheld on amounts over $15,000 (15% in Quebec). Depending on your tax bracket, you may owe additional taxes when you include the withdrawal on your tax return for the year. Funds held in Quebec are also subject to additional provincial tax. Some RRSP accounts are locked-in, which means you cannot withdraw funds. Consult your financial institution or your advisor.
- Group RRSPs are typically employer-sponsored plans in which multiple plan members participate. If you’re a group RRSP member, talk to an advisor about the fees you’re being charged on investments in the group plan versus your individual RRSP. Having both plans doesn’t add anything to your contribution ceiling. And it may be less expensive to hold all your funds in the group plan. Some group RRSPs also have the benefit of an employer match. That’s when the employer matches your contribution — up to a certain limit — dollar for dollar. It’s like free money. Again, talk to an advisor about what’s right for you.
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