Registered Retirement Savings Plans (RRSPs)
RRSP Rules and Regulations
It's important to understand the details regarding RRSP's. The rules governing all RRSPs are set out in the Federal Income Tax Act and are administered by Canada Revenue Agency. Below we have summerized the key aspects you should know.
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Advantages of RRSPs
RRSPs and RRIFs offer two major advantages to investors: tax-deferred contributions and tax-sheltered growth. You don't have to pay tax on the money you contribute to an RRSP. Your contribution is matched with a tax deduction. A spousal RRSP can also be used to effectively split retirement income and minimize taxes. When you withdraw funds upon retirement, they are treated as income and taxed at the full marginal rate. In addition, any withdrawals are taxed as straight income.
RRSPs held through insurance companies offer enhanced creditor protection in the event of lawsuits or bankruptcy. You can begin by investing as little as $30 per month, or you can deposit as much as 18% of your income to a limit of $15,500 (in 2005). You can use a wide variety of investments for your RRSP including GICs and many Mutual Funds. Foreign content limits DO NOT APPLY for insurance company Segregated Funds. Consult with your financial advisor to determine your contribution limit.
Tax-sheltered growth
When you have an RRSP, any interest, dividends, and capital gains you make on the money inside your plan aren't subject to tax. All the profits on your account go to work for you. With RRSPs and RRIFs, you can also choose to rebalance your portfolio as appropriate. The gains you realize on investments inside the plan stay tax-sheltered when assets moved from one class (such as equities) to another (such as bonds).
RRSPs offer many Canadian an incentive to invest for their retirement on a regular basis. For example, if you invest the legal maximum RRSP contribution limit (18 per cent of their prior year's earned income - generally employment income, etc. - up to a maximum of $14,500* less any pension adjustment), you will be making progress towards financially stability and a secure retirement.
Vs. Non-Registered Accounts
In recent years, reductions in capital gains inclusion rates have resulted in non-registered accounts becoming an attractive option for investors. If, instead of contributing funds to an RRSP each year, you deposit the same amount in a non-registered account that holds a mix of equity investments. Upon disposition, profits earned will be considered capital gains, taxable at 50 per cent of the investor's marginal tax rate.
Other situations where ceasing to make RRSP contributions makes sense include when you have already accumulated a significant amount inside your registered plans; when you are approaching an age when you plan to begin withdrawing from the plan; or if you expect to be in a higher tax bracket when you are withdrawing the funds.
It is important to review your personal situation and allocation to registered and non-registered plans with a financial planner.
Segregated Funds for Your RRSP
Segregated funds offer excellent value for the money. Consider these 10 reasons to order segregated funds instead of mutual funds or other bank funds for your RRSP:
- Solid, long-term investment performance
- Maturity guarantees protect your initial investment
- Death benefits guarantee your capital
- Reset guarantees to grow your investments
- Choose from a variety of investment funds
- Creditor Protection ensures extra security
- Disability options maintain deposits if you become sick or disabled
- Enjoy greater freedom from estate or probate fees
- And... there's no waiting in a bank line to secure an RRSP loan
Let us do the work for you! Keep us in mind this RRSP season when talking to friends and those you care about.
Andex
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