RRSPs: What you need to know
Do you know what an RRSP is and what it can do for you?
Whether through your employer, family, or friends, you've probably heard about the registered retirement savings plan (RRSP). But what exactly is it and how does it work? Here's what you need to know about RRSPs and how they can make your money work for you.
What is an RRSP?
An RRSP is a financial tool that provides an incentive to save for retirement. It can also be used for other big projects, such as buying a home through the Home Buyers' Plan (HBP) or going back to school through the Lifelong Learning Plan (LLP).
What are the advantages of an RRSP?
Save taxes now and invest with flexibility
When you contribute to your RRSP, the amount is deducted from your taxable income. This directly reduces your tax bill. For instance, a person with an income of $53,360 to $98,540 in 2023 is taxed at a marginal rate of 37.1 percent. If they contribute $5,000 in a RRSP with FlexiFonds, they will save $1,855 in taxes.*
The advantages of the RRSP+ at the Fonds de solidarité FTQ
By choosing the RRSP+ at the Fonds de solidarité FTQ, they will receive an additional tax credits of 30 percent.** When combined with regular RRSP deductions, the tax reduction increases to $3,355. Their $5,000 in savings will have cost them only $1,645.
To find out how much you personally can save in taxes, use the Fonds de solidarité FTQ's tax savings calculator. However, keep in mind that if you withdraw funds from your RRSP other than through the HBP and LLP, you still have to pay tax on the amount withdrawn.
An RRSP lets you defer the tax you pay on your income. The advantage is that your current tax rate is probably higher than what it will be when you retire. So, by deferring the taxes, you should end up with a lower tax bill than what you received as a deduction when you contributed. In the meantime, the money you invest in your RRSP will grow tax-free.
Make your money work for you
Once your money is in an RRSP, it can generate tax-sheltered profits. For example, if you contribute $1,000 a year over 20 years, you will have invested a total of $20,000.
Let's say you have a constant return of 3 percent per year during this period; this interest will be added to the initial amount and grow. After 20 years, you would have $26,870 in your RRSP—$6,870 more than the amount you initially invested. To find out how much your personal future investments could be worth, use the Fonds de solidarité FTQ's future value of investments calculator.
Contribute to your spouse's RRSP
You can also contribute to your spouse's RRSP. Depending on your situation, this may be a worthwhile retirement withdrawal strategy to pay less tax once you retire. If your income is much higher than your spouse's, your tax rate will likely be higher than theirs. With pension income splitting, you can distribute your retirement income and that of your spouse more evenly so as to reduce both your tax bills. You can do this by contributing to your lower-income spouse's RRSP.
RRSPs: Key takeaways
From this age onward, your annual contribution can exceed $2,000.
You are not allowed to hold an RRSP beyond December 31 of the year you turn 71. By this time, you can choose to convert your RRSP into a registered retirement income fund (RRIF).
This is the maximum percentage of your earned income from the previous tax year that can be contributed, up to a maximum amount of $30,780 for the 2023 tax year. The limit may vary depending on a number of factors, including unused contribution room from prior years and pension plan contributions.
March 1st, 2024
That's the deadline to contribute to your RRSP to reduce your 2023 tax bill. Any contributions after that will reduce your taxes for the 2024 tax year.
Depending on your situation, contributing to an RRSP can pay dividends in terms of both the tax savings and the earnings on your investment. An RRSP can give you the means to achieve your dreams. While contributing early can generate more long-term benefits, there is no ideal age to start. You don't have to have large sums of money to invest—it's always advantageous to add a few dollars to your reserves. The Fonds de solidarité FTQ offers an automatic savings option with the RRSP+ hat can help you put money aside and develop healthy savings habits as you manage your personal finances.
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