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Preparation for the future and retirement is something everyone should do. Contributing to a Registered Retirement Savings Plan or RRSP is a great way to put some money aside.
RRSP’s allow you to have more money for retirement and pay less money on taxes for the amount. The amount you send to the RRSP can be deducted from your taxable income each year and the amounts are not taxed until you withdraw the money.
These Savings Plans can also be used for a down payment on a house, or for education purposes, not just retirement. However, penalties might happen if you don’t stick within the deduction limits set up by the Canada Revenue Agency.
Learn more about the deduction limits to make the wisest decisions on how to use your own Savings Plans.
The deduction limit is the set amount that you can put into your RRSP every year. Even if you meet this limit set, if you had previous amounts left from the previous year, they roll into the next year, giving you more.
The limit is generally a percentage of your income. This does not mean that you have to stop, either because generally, Canadians do not come close to the limits.
You have to calculate your own deduction limit, since it goes off of your own personal income. This can be done by figuring out 18% of your pre-tax income, up to the amount that is specified by the CRA.
If 18% of your income is higher than the CRA’s set number, then the number the CRA put out is your deduction limit (and not the 18%).
It is important to keep in mind that with these types of accounts, if you have multiple accounts, such as for you and your spouse then the deduction limit changes to how much you’re able to put into all of the accounts you have combined.
In order to report your RRSP contributions to taxes, they should be placed on line 208 of your T1 General Income Tax Return. The financial institution who is holding the RRSP for you can provide a financial receipt for the tax year of the amount you have saved.
Any contributions made between March and December have to be reported for that calendar year, while any made between January and February can wait to be reported for the previous tax year or the current year, depending on preference.
The main reason to have a RRSP is to save for retirement, but sometimes life happens. In this case, your RRSP can be used towards other major life things. Here are some great ways you can use your RRSP besides for retirement.
Lifelong Learning Plan
Home Buyer’s Plan
You will have to repay the amount back into your account, but this is delayed. They will require you to pay back the amount after your last eligible withdrawal or five years after the initial withdrawal that you took. The amount has to be repaid back into your savings plan within ten years, or you will be taxed on the remaining amount that has not been put back into the account.
There are many uses for these Savings Plans and having the necessary information can help you decide if they’re right for you. They may be the answer to your retirement plans.
You can continue to make contributions until Dec. 31 of the year you turn 71, and if you have a spousal RRSP then you can contribute until your spouse is 71 years old.
There are other options for continuing contributions, by:
Don’t panic. Things happen and if you’ve accidently over contributed to your account, you can go over a maximum of $2,000 without having to worry about a penalty. You won’t get a write off for that amount, though.
Anything over $2,000 is subject to a 1% penalty per month. It is recommended that you watch to make sure you don’t go over, if possible.
A Schedule 7 form is used for when you go over the $2,000 amount limit. You can then carry a portion of the contribution forward, allowing you to reduce your contribution limit for the next year. You can also use the same form to designate your over-contribution as payment.
You’re able to write a letter to the CRA and explain to them that it was an honest mistake. You can ask them to waive any fees from going over and promise it will not happen again. This may or may not work depending on who receives the letter, but it can be worth it to have the fees waived this once.
Generally, yes. Almost all of the financial institutions that offer RRSPs will have the amount you’re left with and able to pay back into the account on the statements that you receive every month. Keep track of the amount through the use of this feature.
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