THE RRSP SEASON HAS FINALLY ARRIVED!
The end of 2020 is fast approaching and the RRSP season will start soon!
We have prepared a complete article that will answer the vast majority of your questions, concerns, and requests about RRSPs in 2020!
Here you will find the TOP 10 most frequently askamed questions about RRSPs, the TOP 10 Advantages of contributing to this plan, 3 secrets that banks do not want you to know, and more!
We are going to make you experts in RRSP!
But that’s not all. Since we know that it is not really a simple or interesting subject, we have made it as easy to understand as possible!
Okay, let’s start at the beginning and answer a question that those who are new to finance may ask themselves: what is an RRSP?
In fact, the Registered Retirement Savings Plan (RRSP) is a plan put in place by the Government of Canada that aims to provide an optimal retirement planning vehicle for Canadians.
Basically, it’s a vehicle for making tax-free investments. In addition, all the amount you put into an RRSP will reduce your taxable income and allow you to take advantage of tax credits.
The RRSP is intended to be a financial planning tool which comes with many advantages and help you prepare for retirement. In Quebec, it has been an essential tool for decades. But is it still relevant in 2020?
RRSPs have been the tool of choice for Canadians for decades to prepare for and finance their retirement. Is it still such a useful strategy in 2020? The answer is yes!
Despite the arrival of the TFSA and certain other types of investments in the market, the RRSP remains the #1 tax tool for most people to properly plan for retirement.
It comes with advantages that no other investment vehicle can beat and its efficiency is even more important when used with the right strategies.
Whether you are 20 or 60, an RRSP should definitely be part of your savings strategy, whether for retirement or not. Both young and old benefit immensely!
Now that you understand what an RRSP in general is and its importance in planning for your retirement, you probably have a lot of questions in mind!
We have seen this before and that is why we have put together the 10 questions our readers ask us most often year after year to give you the answers.
Your RRSP plan for 2020 should be much clearer and you can understand better the intricacies of this plan once you have read our TOP 10.
Once you have the answers to your questions, go to the next section to discover the 10 biggest advantages of an RRSP!
When we want to contribute to our RRSP, the first thing that matters to us is usually the potential tax return we will obtain.
Those who are not too familiar with taxation may not have any idea how it works.
First, we use the term “RRSP contribution” to define the amounts you decide to put into your RRSP each year.
Any amount you put into your retirement plan is considered deductible from your income and, therefore, entitles you to a tax refund (or return).
In fact, the government is simply giving you back the amount of tax you paid in excess of that money.
The calculation of the amount you will receive following an RRSP contribution is done as follows:
Tax return = Amount of contribution x Marginal tax rate
You contribute $4,000 to your RRSP and your marginal tax rate is 37%.
By placing your money in a regular RRSP, you will therefore receive:
$4,000 x 0.37 = $1,480
The calculation itself is very simple and easy to repeat.
You just need to know your tax rate for the current year according to the federal government’s table.
The RRSP is not an investment product. People often confuse the idea of a product and an investment vehicle.
The RRSP is actually an investment vehicle, inside which you can put the product you want.
View it like a container and its contents.
The RRSP is only a special container (investment vehicle) that comes with many advantages that other containers do not have.
This container protects you and prevents the government from dipping into your investment income, in addition to helping you get better returns on your savings.
The image below can help you visually understand the concept. RRSPs are like “magic” containers that help make your money grow as efficiently as possible.
In Quebec, the deadline for contributing to your RRSP is usually February 29 of the year after the end of your taxation year.
A little confused? Let’s see two examples.
For example, for the 2018 taxation year that is between January 1, 2018 and December 31, 2018, the deadline to contribute to your RRSP so that it is deductible that year will be March 1, 2019.
In 2019, your taxation year will begin on January 1, 2019 and end on December 31, 2019, but you will be entitled to contribute to your RRSP so that it will be deductible that year until February 29, 2020.
You are therefore granted approximately 2 additional months following the end of the year to contribute to your RRSP.
Yes, that’s one of the big advantages of putting your money in an RRSP. This plan acts as a tax shelter where your investments generate income that is not taxable as long as it remains in the RRSP.
You only have to pay tax when you withdraw money from an RRSP.
So, yes, you have to pay tax when you withdraw money from an RRSP. What is the advantage in this case?
In fact, the advantage comes from the fact that you can put the tax you collect on your contribution and make it grow. In addition, investments grow, tax-sheltered.
Finally, when you withdraw, your tax rate may be lower and you may have to pay less tax than the amount of credit you initially obtained.
When you do the math, you realize pretty quickly that it is extremely profitable, even if you have to pay tax when you withdraw money during your retirement.
The maximum amount you are allowed to contribute to an RRSP is based on your taxable income. In fact, individuals in Canada are not allowed to contribute more than 18% of their annual income or the maximum amount allowed.
To calculate how much you can contribute, you just need to calculate 18% of your annual income for the previous year, or you can simply consult your notice of assessment which is more precise and factual.
The government is also targeting a maximum authorized amount that is not based on income. So even if your income allows you to contribute more than these amounts, you CANNOT.
In 2018, the maximum amount you can contribute to your RRSP is $26,230.
In 2019, the maximum amount you can contribute to your RRSP is $26,500.
In 2020, the maximum amount you can contribute to your RRSP is $27,230.
For more information, see the table of maximum contributions for the Government of Canada registered plans.
Do you have to be 18 to contribute to an RRSP?
The answer is no!
In fact, there is no minimum age for contributing to an RRSP in Canada. Rather, the government relies on the fact that you have:
You can start working at 16, and you can then contribute to your RRSP.
Surprised? In fact, it is the TFSA that requires individuals to reach the age of 18, before they can contribute.
The RRSP is based solely on the fact that a person is employed and has their own social security number.
Most RRSPs offered by banks offer the same tax return- your marginal tax rate x your amount of contribution. HOWEVER, there are indeed some RRSPs that offer better returns. These are RRSPs that rely on local development and are supported by the government. The 2 principal ones are:
The RRSP of the Fonds de solidarité FTQ.
The RRSP of Fondaction.
We will give you more a few more details on these 2 RRSPs below.
Amounts in an RRSP cannot be withdrawn unless added to your taxable income. In the short term, this wastes your contribution rights and is not beneficial.
However, there are exceptions. The money in an RRSP can be taken out and used for certain well-targeted government programs.
The funds in an RRSP can be used to finance a return to school under the Lifelong Learning Plan (LLP). You can finance a return to school with the funds from your pension plan, but you will then have to repay them over a given period.
Your RRSP investments can also be withdrawn to finance a home purchase plan as part of the HBP, the Home Buyers’ Plan. You will then have 15 years to reimburse the amount you have withdrawn.
Other programs may exist and we recommend that you inquire with one of our partners for more details.
RRSPs are often associated with well-established adults in their forties.
However, the RRSP becomes very effective if you start using it in your twenties and thirties.
Why? Because young people first benefit from the magic of compound interest faster and this combines with the fact that investments are tax sheltered.
Your savings will grow at a much higher rate and you will save a bigger amount of money if you start contributing at a young age.
In addition, if you plan to buy a property in the near future, contributing to your RRSP to benefit from the HBP could save you up to $10,000!
RRSPs can, therefore, help young people save a small fortune in their projects and help them to build wealth faster.
You now understand what an RRSP is as we have answered most of your questions. You are now probably wondering what the main advantages are that would encourage you to have an RRSP?
Well, we knew that you wouldn’t be convinced so easily which is why we have compiled a list of the TOP 10 benefits to contribute to an RRSP in 2020!
Your retirement plan must include the RRSP and we are determined to prove its effectiveness.
We hope (and are confident) that the following benefits will demonstrate to you just how attractive an RRSP is as a tax tool for accumulating money for retirement.
As we have already explained to you, when you contribute to an RRSP, the amounts of your contributions decrease your taxable income.
How is this an advantage for you?
Well, because in the year of your contribution, this entitles you to a tax refund for the tax you overpaid.
You will therefore be entitled to the return of the amount equal to your contribution multiplied by your marginal tax rate. Some RRSPs can give you a bigger return.
The fact remains that this amount can represent $1,500 to over $10,000, depending on your situation.
Imagine what you can do with this money!
The RRSP not only allows you to recover any overpayment on your tax for your contributions the year that you contributed but it also offers you another potential advantage when withdrawing.
If you withdraw at retirement at a lower tax rate, then you just foiled the tax and you won’t have to pay back as large a tax amount as the credit you got.
Here is an example to help you understand.
For $1,000, the savings do not seem so important, but over a lifetime of contributions, that becomes a small fortune!
In addition to giving you an immediate tax return, the RRSP acts much like a tax shelter since it allows your investments to grow tax-free.
In fact, the RRSP is the only plan that allows you to grow your investments without the government being able to tax you each year, whether they are:
Think of an RRSP as a safe deposit box where you put your money and where the government can’t touch your money until you take your money out.
This is so convenient, isn’t it?
So convenient that you should use it!
If you started contributing to your RRSP at a young age and want to become a homeowner, you can SAVE A LOT OF MONEY!
Why? Because the Government of Canada has allowed its citizens to use up to $25,000 per person from their RRSPs to finance the purchase of their first property.
If you are married, you can withdraw up to $50,000 from your RRSPs to finance the purchase of your home.
How is it beneficial? Well, it’s because you got a tax return on that $50,000.
If, for example, you and your spouse had a 37% tax return on that $50,000, then you saved $18,500.
If you keep it in your savings, it gives you a significant amount to finance your home.
As you can see, we are not talking about small amounts. Young people who contribute to their RRSPs at a young age therefore get a very big advantage (or consider it a gift) from the government when the time comes to buy their first home.
An RRSP is a tax shelter for retirement but what happens after you retire?
Are you fully taxed on all the money in your RRSP?
The answer is: of course NOT!
In fact, the government has put in place an ingenious system where you can simply transform your RRSP into a new registered plan called a RRIF (registered retirement income fund).
You can turn your RRSP into a RRIF through many banks, insurance companies, trust companies, etc.
This will allow you to gradually pay out retirement income that will minimize your tax liability.
So not only is the RRSP a government program that saves you tax, but the RRIF is another government fund that can greatly improve your financial situation.
There are a host of technical details about the RRIF that may interest you.
After retirement, your RRSP can be split with your spouse to minimize the tax impact and the tax of the amounts withdrawn.
If you think that this is an insignificant advantage today, we guarantee that once you retire, the savings will be extremely attractive.
Learn more about the possibilities for income splitting authorized by the Government of Quebec.
When you die, most of your assets will likely be liquidated and you may need to pay tax on the disposition of certain assets.
However, the government sympathizes and has decided that the RRSP will be among the “chosen” that will be entitled to a significant advantage – the fact that they can be rolled over to the spouse in the event of your death.
Thus, if you die, your RRSP amounts will not be fully taxed but rather transferred to your spouse without the government imposing anything.
Your spouse can then gradually withdraw the funds to pay for the cost of living. You are guaranteed that the tax rate will be lower and that the government will come to collect a smaller share of your RRSPs.
Even at death, you continue to benefit from the RRSP!
The RRSP has more surprises for you.
In addition to being able to help you with a home purchase project (HBP), it can help you finance other projects, including:
This will save you possibly thousands of dollars since you will not have to pay tax and can then pay back your withdrawals over a given period without interest.
Another advantage of an RRSP is that there are some that can offer you a very attractive tax return.
The RRSPs of QFL and Fondaction offer additional tax credits of 30% and 35% respectively.
This means that you practically double your tax return amount.
For example: if you invest $1,000 and your marginal tax rate is 37%, your regular RRSP will give you $370. However, with the QFL RRSP, you will be entitled to a 67% return, so you will withdraw $670. This is a big difference, right?
The Fondaction RRSP is the one that offers the biggest return.
However, we strongly advise you to consult one of our experts before choosing these products as they are a little more complex and come with certain important conditions and characteristics that you need to understand.
Finally, the benefits of an RRSP are so great that it has become the most effective tax planning tool for retirement in Quebec!
This will still be true in 2020 and all financial planners and experts have a perfect understanding of how they work.
They are also familiar with other investment vehicles similar to RRSPs and are very flexible.
RRSPs can accommodate almost any investment product and is structured around a long-term high-performance strategy.
Whether it’s to plan for your impending retirement or to use your RRSPs for a home purchase or other project, the possibilities are really endless with this savings plan.
It is for good reason that it has been the #1 choice of Canadians for years!
RRSPs may be popular and widely used in Quebec but some details are often forgotten by everyone.
Banks keep a few secrets they won’t necessarily reveal to you.
These “details” can still have a certain impact on your financial situation and could lead you to make different decisions. We want you to have all the information before you shop for your RRSP.
Here, we reveal 3 of these secrets that could give you a head start on your lender and allow you to have all the cards on the table before making a decision.
The deadline for contributing to your RRSP is fast approaching. Your banker and financial advisor are pressuring you to put as much money into your RRSP as possible.
On the other hand, you’re not too late this year due to certain situations, but you’re afraid of losing your contribution room.
Well, rest assured that you can accumulate and defer your contribution room.
Your lender may not tell you right away, but if you ask, they will confirm it.
If you skip a year, you can contribute more money the following year. You can also postpone your tax return requests to wait for the years when your tax rate is highest in order to enjoy a bigger return.
Our partners can help you use the optimal strategy for you.
Your banker will try to convince you to take out your RRSP with him and will do his best to have you as a client. Once you agree, he will not tell you, and it is normal, that it is possible to have several RRSPs!
Even if you already have an RRSP in a bank, you can very well open many others in various other institutions.
You can, therefore, have an RRSP with Desjardins, RBC and the FTQ fund simultaneously.
This is an important concept to understand because many people think they are tied to their financial institution.
Now that you know the secret, you can open as many RRSPs as you want and adapt a strategy as you see fit.
This advice can take you far, especially with the right expert!
We’ve told you again and again but it’s worth emphasizing it a little bit more.
Banks will never suggest or tell you to put your money in certain other types of RRSPs that may offer you better tax returns.
For example, the RRSP of the FTQ and Fondaction offer 30-35% more in return which could be interesting for many customers.
However, they do not offer this product at the outset because it is not one of the products offered by financial institutions.
However, there are, indeed, RRSPs that give you more for your money, under certain conditions.
This larger return comes with certain conditions, of course.
But if they are right for you, you could actually withdraw almost twice as a tax refund.
It can, therefore, allow you to realize many dreams and projects!
You are now an expert in RRSPs and we hope that we have answered all your questions!
If you would now like to open an RRSP, make a contribution, or obtain further advice in this area, we suggest that you complete our form to obtain the services of a partner financial advisor at Compare Insurances Online!
Our form is free of charge and without obligation. The services of our partners may, however, carry a fee, depending on the nature of your needs.
When you fill out our free form, we will put you in touch with a partner financial advisor in your sector!
They know the RRSP very well and can help you open an RRSP or make any changes to your situation.
They can also help you choose the investment products to integrate into your RRSP.
Fill out our form right away to get help from one of our partner advisors!
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