Registered Retirement Savings Plans
Registered Retirement Savings Plan, introduced in Canada, is a sort of retirement benefit account where every Canadian can contribute towards his or her retirement goal on a tax deferred basis and gets tax refund based on his or her marginal tax bracket. The total limit of contribution in the RRSP account is set by CRA every year and all Canadians can check their notice of assessment for current and previous RRSP room available to them.
It started in 1957 with the sole purpose of promoting savings to provide after-retirement financial security. It complies with the provisions of Canadian Income Tax Act. Various rules relating to rate of contribution by employer and employee, timing of contribution and the availing of tax exemption is provided in the RRSP contract.
The funds contributed in Registered Retirement Savings Plans can be invested in variety of vehicles like: mutual funds, segregated funds, income trusts, shares, bonds, guaranteed investment certificates, etc.
• The contributions made to the RRSPs are allowed as exemption in calculating the tax liability. But the same is taxed when the withdrawals are made from the saving plan either during retirement. The effect is that the contributions so made are taxed at marginal rate at the time of retirement.
• The return from the investment made is not taxed.
• Investment of increased income in RRSPs defers the benefits of increased income. So as one’s income increases, pension benefits decreases.
• RRSP money can be utilized tax free by both husband and wife to the tune of $ 25,000 each towards buying their home as first time Home Buyer Plan. They have to deposit back all the money starting following year by making 1/15 equal installments payable each year.
• RRSP funds can also be utilized by individuals to fund their higher education under Life Long Learning Plan.
Types of Registered Retirement Savings Plans:
• Individual RRSP: In Individual RRSP, account holder himself makes contributions to the account and gets deduction on account of calculation of tax liability from the contributions made to the account.
• Spousal RRSP: In Spousal RRSP, the account is opened in the name of Spouse. The contributions to the account are made on the name of spouse. Spouse has all the rights relating to withdrawal of funds and can also claim exemption on account of contributions made to the account while calculating the tax liability. Please keep in mind attribution rules.
• Group RRSP: Group RRSP is set up and regulated by employer. Employer deducts a specific amount from the salary of the employee and makes contribution to Group RRSP. The employer himself contributes to RRSP of employee. There is no specific rate at which the employer should make the contribution. It can be more, less or equal to employee’s rate of contribution depending upon the terms of the plan. The contributions so made are allowed as deduction while computing the tax liability.