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When is the latest date that I can contribute for the 2009 tax year?

Though it is always best not to procrastinate, the deadline for the 2009 tax year is March 1st, 2010.

Why are RRSPs a good place to invest?

RRSPs give the following benefits aside from saving in a tax-deferred environment:
• Contributions allow for a tax-deduction from income, and can result in a tax refund.
• All returns earned on RRSP investments accumulate tax-free inside the plan.
• You have the flexibility to contribute anytime throughout the year, and up to 60 days after the end of the year.

How do I know if I am  eligible to contribute?

All Canadian taxpayers with "earned income" in the previous tax year, or those having unused contributions from previous years can contribute. Beginning with your 1991 contribution limit, you can carry forward any unused deductions.

How does carrying forward unused contribution room work?

If your allowed contribution is not made in a givenyear, you can carry forward any unused portion to a future year without affecting your annual contribution limit. For example, if you are eligible to make a $21,000 contribution this year but are able to contribute only $15,000, you can carry forward the $6,000 amount to a future year without affecting your regular contribution limit.

How much can I contribute?

After filing last year's tax return, the Notice of Assessment that you received from Canada Revenue Agency (CRA) stated your maximum contribution for the current year. You may contribute to your RRSP until December 31 of the year in which you reach age 71. After 2010, increases to the annual RRSP contribution limit will be indexed.

For those who are a member of an employer-funded RPP or DPSP: for the 2009 tax year, your current year's RRSP contribution limit is 18% of your previous year's earned income subject to a maximum limit, plus any unused contribution room carried forward from previous years.

Source: CRA

What if I over-contribute?

Over-contributing to a maximum of $2,000 during your lifetime is allowed. You can deduct the over-contribution in future years, insofar as you have contribution room against which the deductions can be applied.

If you can no longer contribute to your RRSPs in 2009 because of your age, you can still deduct the contributions you made in a previous year, up to your RRSP deduction limit. Thus you can claim undeducted contributions in future years - even past age 71.

Note: Overcontributions in excess of $2,000 are subject to a penalty of 1% per month by Canada Revenue Agency (CRA). CRA's penalty is applied at the end of each month.

How do I handle my RRSP when I turn 71?

Canadians contribute to an RRSP in order to finance their retirement. Thus, money saved during working years will be used to fund income during retirement. Withdrawals are then taken as opposed to contributions being made. At retirement, a few choices are available:
•  You can fully cash in your RRSP which will then be taxable.
• You can transfer the investments in your RRSP to a Registered Retirement Income Fund (RRIF) and/or a Registered Annuity, after which you a must begin drawing retirement income.

What is the Home Buyers' Plan?

With the HBP, you can take up to $25,000 out of your RRSP to put towards the down payment on your first home without being taxed on it; though it must be paid back to your RRSP within 15 years. It's a great way to make the transition from renter to owner, especially while mortgage rates are favourable.

Does the Lifelong Learning Plan allow me to go back to school and use my RRSP?

With the LLP you can withdraw up to $10,000 per year and up to $20,000 in total when you participate in the LLP to help pay for your, or your spouse's full-time education.  Withdrawals must be repaid to your RRSP over a ten-year period, beginning no later than 60 days following the fifth year after the first withdrawal is made.  After your studies are complete, your repayment minimum amount will be determined on your Notice of Assessment from CRA.

Who should invest in an RRSP?

•  Employed or self-employed Canadians who save for their retirement and want to reduce their annual tax bill (contributions are tax-deductible during pre-retirement income-earning years).
•  Those who have company pension plans can add extra retirement income to ensure that retirement needs are met (assuming they do not exceed the annual contribution limit set by CRA on their Notice of Assessment). For those who don't have company pension plans, RRSPs can help fund retirement.
•  Married couples can reduce their combined tax burden through a spousal RRSP (if one spouse earns more). At retirement, when the funds are withdrawn, income can be split to reduce overall taxation.

What is the effect of tax deferral on growth?

Contributions are invested and earn tax-free income, providing investors with more savings to live on during their retirement (taxable when withdrawn). For illustrative purposes, let's assume that an annual RRSP contribution of $21,000 grows at 7% over 30 years. If the investor is in a high tax bracket of 40%, the RRSP grows to approximately 60% more than it would amount to if invested at the same rate in an unsheltered investment. The RRSP will be valued at $1,983,677, while the non-registered money will equal only $1,217,915. You can see from the graph that time is the investor's greatest asset.

Can you withdraw money pre-retirement?

Subject to the terms of the investment you choose, you can withdraw part or all of your RRSP money at any time. Any withdrawal will be considered income in the year of withdrawal, and subject to income tax. When you withdraw funds from your RRSP, the institution will withhold a prescribed amount of the withdrawal as an instalment for your income taxes. This is similar to receiving a paycheque and having income tax taken off.  There is no taxation if you are directly transferring RRSP funds from one RRSP to another.

Note: New rules allow Canadians with a registered retirement income fund (RRIF) to transfer money back into an RRSP since we can now contribute to RRSPs up to age 71 (vs. age 69 previously).

Who can be RRSP beneficiaries?

Where applicable, consider naming your spouse or common-law partner, dependent child or dependent grandchild, rather than your estate, as beneficiary of your RRSP or RRIF. Assets may pass tax-sheltered upon your death directly to an existing or new RRSP or RRIF of your surviving spouse or common-law partner, or to a dependent child's annuity (transfer via a Designation of Beneficiary in your RRSP or RRIF or via your will).

Can a dependent child be a beneficiary of an RRSP?

The RRSP or RRIF money can be transferred to an annuity for a financially dependent child or grandchild under age 18  and  provide benefits payable to the beneficiary until the year they reach age 18. Funds can also be transferred to an RRSP of a child of any age who is dependent on you due to a mental or physical infirmity.

Enhancing your retirement portfolio

In addition to the RRSP, another investment offering a tax incentive is the tax-free savings account (TFSA). The TFSA allows a maximum contribution of up to $5,000 per year. Only those who are 18 years old or over, and are Canadian residents, are able to contribute to a TFSA.

When the TFSA is an exceptional choice?

•  If the tax rate at the time of withdrawal is expected to be higher than at the time of contribution, your best choice would be the TFSA.
•  The TFSA would also be a good investment if you are a member of a pension plan and have minimal, if any, room to invest in your RRSP due to a high pension adjustment (PA) factor You can supplement your retirement savings through the TFSA.
•  For those retirees with low income, every dollar withdrawn from a RRSP or RRIF will reduce the Guaranteed Income Supplement (GIS). The TFSA is not viewed as income nor taken into account when calculating eligibility for GIS, tax credits, Employment Insurance, and so on.

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