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The world of investing for saving purposes can be complicated but it is not necessarily difficult. All it takes is some management and a little advice along the way. Everyone has their own needs and reasons for saving: kid’s education, buying a home making sure to have enough retirement income to last. Whatever your needs, there are different government saving options with different features to cater to your needs, accumulate savings, and encourage smart investments. One of these is the Registered Retirement Savings Plan (RRSP). 

What is RRSP?

A Registered Retirement Saving Plan (RRSP) is a retirement investment plan system established by Canada Revenue Agency (CRA) in 1957. Saving money can be hard when there are several demands on your paycheque. However, through RRSP and many other saving programs Canadian government supports the taxpayers to boost their savings through tax breaks and other incentives.

How does RRSP work?

RRSP is a superhero of modern retirement planning for Canadian taxpayers. An RRSP is what’s called a tax-advantaged account. What exactly is meant by the term “tax-advantage”? To Canadian tax-payer, it means in practice “free government money.”

You can hold a variety of qualifying investments including cash, gold, guaranteed interest products, saving bonds, treasury bills, bonds( government, corporate, and strip bonds), mutual funds( RRSP eligible ones), equities (both Canadian and foreign stocks), Canadian mortgages, mortgage-backed securities, segregated fund contracts, and income trusts. 

An RRSP is a powerful saving tool because the contributions to it are tax-deductible, and the taxes on any investment growth are deferred until the money is taken out. Tax-deductible contributions mean you will have more of your income available for your current needs, even while you are saving for the future.

A marginal tax rate is applicable only when an individual withdraws income earned in RRSP. This allows for tax deferral, which means any money contributed in RRSP will be exempt from CRA taxes and will only be taxed years down the line when it is withdrawn. This tax deferral is allowed usually until a person retires or turns 71. Tax-deferred investment growth (interest, dividends, capital gains) keeps more of your money working for you. 

Who is eligible for an RRSP?

Opening an RRSP is super easy. The only conditions for eligibility are that a person should be under 71 years of age, are a Canadian resident for tax purposes, and file income taxes in Canada. Minor under 18 years of age can set up RRSP with written parental/ guardian consent.

Where to Open an RRSP account?

RRSP account is created through a financial institution such as:

  • Banks and trust companies
  • Credit unions.
  • Mutual funds companies.
  • Investment firms.
  • Life insurance companies.

The financial institution can advise you on the types of RRSP (Individual, spousal, group) that best suits your situation. You have many choices of institutions where you might open RRSP but consider trying to find one that:

  • Requires no minimum investment.
  • Charges low fees.
  • Is easily accessible and available to support through its professionals.

Maximum RRSP contribution limit 2021

For 2021 the limit was $27,230. For 2021 the RRSP deduction limit is $27,830. The RRSP contribution limit is the maximum amount a taxpayer is allowed to deposit into an RRSP annually.

If you have both a regular RRSP and a spousal RRSP, the deduction limit is the maximum amount you can contribute to all your accounts combined. Generally, you are allowed to contribute up to 18% of your previous year’s earned income, to a maximum limit set each year by the Income Tax Act and Regulations, plus any unused contribution room carried forward from prior years.

RRSP Deadline for 2021 Tax Year

“March 1, 2021” is the last day to make RRSP contributions for the 2021 tax year. It means you have 60 days after the year-end December 31, to make an RRSP contribution for the previous year.

What happens if the RRSP deadline is missed?

Missing the RRSP deadline means you did not contribute to your RRSP at all last year. When you don’t contribute to your RRSP you miss the opportunity to let your retirement money grow tax-free. Although you can’t catch up on that time, you can put the money in later. You can carry forward an unused contribution room. You can open and contribute to an RRSP at any time of the year. Just make sure not to exceed the contribution limit set for a particular year.

It is advisable not to wait until March 1, the sooner you stash your cash in an RRSP, the sooner it will start growing.

If you are looking for a professional accountant who can structure your RRSP contributions and assist you in reaping the maximum benefit offered by this powerful savings tool, then feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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