Investment News - January 15, 2008

Registered Retirement Savings Plan
(RRSP )

 

February 29, 2008 is Canadian RRSP Deadline for 2007 Tax Year

This is the deadline for making RRSP contributions for deductions against your 2007 tax filing

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a retirement investment plan registered with the government to which you or your spouse can contribute through RRSP-eligible investments, such as some stocks and mutual funds. For information on what investments are RRSP eligible, please contact the Grandview Credit Union Ltd.

Deductible RRSP contributions can be used as a means to reduce your taxes. Amounts earned in the RRSP investment is usually exempt from tax for the time the funds remain in the plan. When you cash in or receive payments from the plan (typically at retirement) you will then pay tax on those amounts.

When is the RRSP deadline for the 2007 tax year?

Contributions made in the current year or in the first 60 days of the following year must be reported on the current year’s tax return. February 29, 2008 is the deadline for making contributions to your (RRSP) for the 2007 tax year.

How much can I deduct on my 2007 taxes?

The amount you can deduct on your 2007 tax filing is based in part on a percentage of your previous year's earnings and any eligible deduction room carried forward from the previous year. An individual’s RRSP deduction is based on 18% of their previous year’s earned income less the individual’s pension adjustment, up to an annual limit. Your RRSP deduction limit is shown on your Notice of Assessment or Notice of Reassessment for the previous tax year.

If you are unable to use any part of your RRSP deduction limit for 2007, the unused amount can be carried forward to next year, increasing your deduction limit for 2008. Unused deductions can be carried forward indefinitely.

When can I withdraw money from my RRSP?

Even though there is no minimum age limitation on when you can withdraw from an RRSP, the Income Tax Act states that a Registered Retirement Savings Plans (RRSP) must mature by December 31 of the year in which the plan holder reaches age 71.

 

At the time an RRSP matures, plan holders must choose what they want to do with the retirement savings.  Three options – or a combination of them – are possible:

  • Cash in the RRSP
  • Purchase an annuity
  • Convert the RRSP to a Registered Retirement Income Fund (RRIF)

 

Cashing in the RRSP

When an RRSP is cashed in, the entire value of the plan will be included in the plan holder’s income for the year of withdrawal – and taxed at their marginal income tax rate.  This could entail a tax bite exceeding 45%.  So, withdrawing all RRSP savings is probably not the best way to start retirement.

 

Amounts withdrawn from an RRSP are taxable as income when they are received. Tax is withheld by the RRSP administrator and will be applied towards the annuitant’s taxes when he or she files his or her annual tax return. Taxes are withheld based on the following schedule:

 

Amount Withdrawn

All Provinces but Quebec

Up to $5,000

10%

$5,000.01 to $15,000

20%

$15,000.01 and above

30%

 

Purchasing an annuity

Annuities pay a predetermined amount of annual income over a specified period.  The amount paid will be based on the amount invested, on interest rates at the time and the length of time annuity payment is guaranteed.  Unlike cashing in an RRSP, when an annuity is purchased, the amount received annually will be taxed as income each year.

 

Converting to a RRIF (Registered Retirement Income Fund)

A RRSP can be converted to a RRIF at any age no later than December 31 of the year in which the plan holder reaches age 71.

 

When an RRSP is rolled into a RRIF, no taxes are payable on the transferred funds.  Tax is generally only payable on amounts actually withdrawn from a RRIF, allowing the remaining assets to continue to grow on a tax-deferred basis.

 

Once a RRIF is established, the annuitant is required to withdraw the minimum amount as defined by the Income Tax Act.  In the year a RRIF is established, no minimum withdrawal is required. 

Funds are usually held in an RRSP plan until retirement at which time they may be withdrawn or migrated to other investment plans. If your RRSPs are locked-in you will not be allowed to withdraw funds from them without penalty until you terminate employment and the plan (i.e. retirement). Contact the issuer / financial institution holding your RRSP investments for further information about withdrawal and see the Canada Revenue Agency web site for information on withholding rates on withdrawals.

Two programs exist for making withdrawals tax-free from your RRSP under the requirement that you repay the amounts:

HOME BUYER’S PLAN / LIFELONG LEARNING PLAN

  • The Home Buyers' Plan allows you to withdraw up to $20,000 from your RRSPs to buy or build a home for yourself or for someone who is related to you and is disabled. You have up to 15 years to repay the amount to your RRSP.
  • The Lifelong Learning Plan also allows you to withdraw up to $20,000 (limit of $10,000 annually) from your RRSPs to finance training or education for you or your spouse or common-law partner. You cannot use your RRSP to fund a child's education.

Where can I get more information about RRSPs?

For further information about RRSP consult:: the Canada Revenue Agency web site: http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/rrsps-e.html

 

Call Grandview Credit Union today to discuss your RRSP options: Phone 204-546-5200