Lisa MacColl is a writer, investor and former compliance consultant in the group retirement and individual wealth management fields. Lisa has written about personal finance for 14 years and currently writes about investing and investment providers for Wealthsimple. Lisa's past work has been published in Canadian Money Saver, Advisor’s Edge, CBC, and CreditCards.ca. She was a nominee for the 2015 Oktoberfest Women of the Year, Professional Category. Lisa holds an M.A. and B.A. from the Wilfrid Laurier University.
RSP stands for Retirement Savings Plan and spans many different types of savings vehicles — one of which is an RRSP, or a Registered Retirement Savings Plan.
Why’s the registered part important? For two reasons: 1) any contributions to the account can be deducted from your income when it comes to reporting your taxes, and 2) you can put only a certain amount of money in it each year. (Typically, that amount is limited to 18% of your pre-tax earnings from the previous calendar year, unless the Canadian Revenue Agency’s maximum for contributions is lower.) But don’t worry, we’ll get into that in more detail below.
Other kinds of Retirement Savings Plans — like Registered Pension Plans and Non-Registered Accounts — offer their own advantages and disadvantages (and, of course, their own only-very-slightly-different acronyms). We’ll tell you about those below too.
Types of RSPs
There are many different types of Retirement Savings Plans that come with their own very nice tax advantages. Here’s a look at each.
Registered Retirement Savings Plan (RRSP)
RRSPs are the most famous of the RSPs. Often, when a financial institution refers to an RSP, they mean RRSP.
An RRSP can be opened only with financial institutions approved by the CRA. The good news? A lot of places offer them.
RRSP contributions are tax-deductible to a specified limit every year, normally 18% of the pre-tax earnings from the previous calendar year or the limit set by the CRA, whichever is less. Although there is a caveat: unused contribution room is carried forward every year and added to the next year’s contribution limit. So if you don’t max out your contribution for this year, you can catch up later.
You’ll receive a contribution receipt from your financial institution. These contributions can reduce the amount of income tax you will have to pay, which is the very nice part about opening an RRSP.
Any investment earnings are tax-sheltered until the funds are withdrawn. In other words, as long as the funds remain in the account, you do not have to declare investment earnings on your income tax. (The opposite is true too: if you have investment losses on investments held in an RRSP, you cannot use them to offset investment gains.) This setup lets you use the power of compounding to build your retirement nest egg.
You can contribute to an RRSP in your name or your spouse’s name until December 31 of the calendar year in which you or your spouse turns 71. At that point, the plan must be converted to a Registered Retirement Income Fund (RRIF), which pays out (and is taxed) at least a minimum amount each year.
Any funds you withdraw from an RRSP must be declared as part of your income for the calendar year in which you withdraw them. Depending on your personal circumstances, that can lead to a hefty tax bill.
In case all of this talk of retirement accounts has you wanting to learn more, here’s a look at the other types of RSPs:
Tax-Free Savings Account (TFSA)
Tax-Free Savings Accounts (TFSA) have been around since 2009. You’re not limited to saving for retirement with this account, although it can absolutely be used for that purpose.
If you don’t already have a Tax-Free Savings Account, lucky you! You’re going to have a ton of contribution room when you decide to open a TFSA. A word of warning, however: don’t dare over-contribute. You’ll be taxed on the excess right until the moment you take it out of your account.
Contributions to TFSAs are not tax-deductible, so they don’t reduce the amount of taxes you pay right now. The good news is, however, that any money you make within your TFSA is not taxed, which is where the “tax-free” part of “tax-free savings account” comes in.
Financial institutions must report TFSA contributions to the CRA. It’s your responsibility to keep track of your contributions; you won’t receive a formal receipt at year’s end like you do for RRSPs. Many investment providers will track your contributions for you when you open a TFSA, which makes it easy to stay within the yearly limit.
The earnings on investments held in a TFSA are tax-sheltered and do not have to be declared on your income tax. If you have losses on investments held in a TFSA, you cannot use them to offset investment gains. Withdrawals are non-taxable. They do not need to be included in your income and declared on your T1 General Income Tax Return (the form you complete to file your taxes every year).
Registered Pension Plans (RPP)
Many employers set up pension plans for their employees. There are two types. Defined Benefit (DB) plans promise to pay a set pension amount based on a formula including age, years of service, and earnings history. Most DB plans do not allow employee contributions. Defined Contribution (DC) plans provide pension benefits based solely on the contributions and investment earnings. Many DC plans do allow employee contributions.
One nerdy warning: contributions to an RPP have an impact on RRSP contribution limits. RPP contributions are listed in box 20 on your T4 income slip and are declared on line 207 of your income tax return.
Pension plans are governed by rules in the province the company is located (PEI does not currently have pension legislation). Federal employees or companies with employees in more than one province (multi-jurisdictional) have special rules. If you have questions about your employer pension plan, ask your human resources department or talk to your plan administrator.
The rules set out conditions for:
Eligibility: how long an employee must work for the company before joining the pension plan, what type of employee can join — most plans allow only full-time, permanent employees
Vesting: when an employee can also receive employer contributions if they leave the company before retirement. For example, if a plan has 2 years’ vesting or if an employee leaves before 2 years, they will forfeit any employer contributions. If the plan allows employee contributions, the employee will always receive those contributions back.
Locking-in: the point at which funds cannot be withdrawn from the plan until the retirement age specified in the plan documents. If the employee is terminated, funds must be transferred to a Locked-In Retirement Account. In the event of a marriage breakdown and the pension funds are transferred to a former spouse, those funds must remain locked-in under the same plan rules that would apply to the employee.
Normal Retirement Age (NRA): the age an employee can retire from the company and begin receiving a pension plan. Early retirement is generally 10 years earlier than the NRA date.
Non-registered accounts are similar to a savings account in that you don’t receive tax benefits, and investment earnings and losses are fully taxable. Remember, different types of investments have different tax consequences. The advantage of non-registered accounts is that they’re permitted to hold a wider array of investments than a registered account. They’re also perfect for using after you’ve maxed out accounts with tax advantages.
Registered accounts such as RRSP, RPP, and TFSA have strict rules about what types of investments can be held in the account. Those accounts are limited to:
Mutual funds, segregated funds, exchange-traded funds
Securities listed on a designated stock exchange (derivatives may be excluded)
Non-qualified investments for registered plans include:
Investments that trade on over-the-counter markets
A non-arms-length transaction, such as a debt to the account holder or shares in a company the account holder has more than a 10% interest in
Private mortgages, syndicate mortgages, angel investor arrangements, and other types of third-tier investment arrangements. Also: Wealthsimple’s new Venture Fund.
You must be 18 years old to open a non-registered account. Unlike RRSPs, non-registered accounts have no age limit (you don’t have to close the account at a certain age) or contribution limit. You can deposit as much as you want and hold the accounts for as long as you want.
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