Personal Finance - RRSP Facts

Facts

What is RRSP?

To learn about RRSPs, or officially known as Registered Retirement Savings Plans (RRSPs), you just need to know about two things:

1. RRSP is a registered plan to save for your retirement.
2. RRSP can reduce your tax dollars paid to the government.

If you think your retirement is still too far to be worried about, the tax saving feature of RRSP can bring you the immediate benefit which you cannot ignore.

Your contributions to the plan during the year or within 60 days after year end are tax deductible while filing for the annual tax return. In general, the tax saving you will get for the contribution you made is equal to your personal marginal tax rate. For example, if you are earning an annual income of $35,000 and paying a marginal tax rate 25%. For $5000 contribution you made into your RRSP plan, you will save $1250 ($5000*25%) in tax dollars.

Advantages

Tax-shelter
No tax within the RRSP plan. This simply means your investment earnings in RRSP are tax-free and they can compound tax-free until its withdraw.

Tax-Deferral
However, keep in mind, RRSP doesn't eliminate your tax. It just deferred you tax until you make withdraw from the plan - usually at a lower tax bracket while you are in retirement.

Contribution Limits - the maximum amount you can put into your RRSP every year

1. Complex way to calculate your annual RRSP contribution limits: (A) + (B) - (C)
(A) the individual's unused RRSP deduction room carried froward from the previous year
(B) the lesser of:
(i) the RRSP dollar limit

Year	Dollar limit
1996 - 2002	$13,500
2003	$14,500
2004	$15,500
2005	$16,500
2006	$18,000
2007	$19,000 - proposed increase?

(ii) 18% of earned income for the prior year
(C) the pension adjustment (PA) for the prior year reported to the CRA (Canada Revenue Agency) by the individual's employer

2. Easy way: There's a far more easy way to get your annual RRSP contribution limit. CRA did all the complex calculation for you,and it's right on your latest Notice of Assessment letter mailed by CRA to you.

Thereis an over-contribution limit of $2000 for lifetime.

How long can yo contribute?
- until December 31st of the year you turn to 69

How about the unused contributions?
- you can carry forward indefinitely
- or you can catch up at any time

How to set up an RRSP?
People generally set up a RRSP account through a financial institution such as a bank, credit union, brokerage house, mutual fund company, or insurance company. Your financial institution will advise you on the types of RRSP and the investments they can contain.

History and Statistics

Since its introduction in 1957, the rules of RRSP keep on changing to increase the equality and close loopholes.

Facts

What is RRSP?

RRSP