The RRSP is probably the best known tax savings vehicle to accumulate a retirement nest egg. The RRSP is really a ‘tax deferred’ account rather than a ‘tax free’ account. Contributions to the RRSP are tax deductible against income earned in the year they are made. Growth and income earned within the plan remains tax sheltered until withdrawn. All withdrawals are treated as fully taxable income for which a T4RSP is issued.
The greatest benefit of this plan is realized if the tax deductible contributions are made during your peak earnings years and the withdrawals are made in lower income years, when your tax bracket is lower (e.g. after retirement, during maternity leave). However, if income in retirement (from pensions and other taxable sources) is quite high, the tax deferral benefit may not be great because the individual’s tax bracket could end up being higher during the withdrawal years than during the contribution years.
Annual RRSP contribution limits are based on 18% of the previous year’s earned income (less pension adjustment) to a maximum amount set each year. The maximum RRSP deduction limit for 2012 is $22,970. The maximum for 2013 will be $23,820. However, if you have unused contribution room to carry forward from previous years, your personal limit may be higher. Check your Notice of Assessment from the CRA from last year’s return to find out exactly how much contribution room you have. Contributions can be made up until 60 days following the tax year you’re claiming the deduction for. We can help determine if an RRSP is right for you and how your contributions should be invested. Contact us for more information.