#Registered #Retirement #Savings #Plan #RRSP #Deduction #Overview
What is the Registered Retirement Savings Plan (RRSP) deduction?
The registered retirement savings plan deduction is the maximum amount a Canadian taxpayer can contribute annually to a savings plan and deduct it from taxable income that year.
Generally, the amount is 18% of the taxpayer’s earned income for the previous year, up to an annual maximum. For tax year 2024, the annual limit is C$31,560, and for 2025, it is C$32,490.
An individual’s contribution limit can be determined by filling out Form T1028, which is… Available online.
Key takeaways
- The RRSP deduction is the maximum amount a taxpayer can invest in a retirement account and have it deducted from their income tax for that year.
- Generally, the maximum is 18% of income earned in the previous year, with a limit that is adjusted annually.
- Taxpayers can contribute less than the maximum, but it is in their best interest to take advantage of the highest tax break.
Understanding the RRSP deduction
Anyone can contribute less than the maximum amount allowed. Since this is a deduction from taxable income, it is in the taxpayer’s best interest to save the maximum amount in order to reduce the amount of income subject to personal income tax.
Canadian taxpayers can set up a registered retirement savings plan through a financial institution such as a bank, credit union, trust, or insurance company. The financial institution advises its clients on the types of RRSPs and investments available.
Married people, especially, have decisions to make. A Canadian government website notes that couples can create a spousal or common-law partner RRSP in order to ensure that retirement income is divided equally between both partners.
A self-directed RRSP allows an investor to make his or her own investment choices, buying and selling at will.
The greatest benefit is achieved if the high-income partner contributes to the low-income partner. In this case, the shareholder will receive the immediate benefit of the tax deduction on that year’s contributions. But the retiree, who is likely to be in a lower tax bracket during retirement, will receive and report the income.
Other options
If you prefer to take charge of your own investments, you may want to set up a self-directed RRSP. This type of plan allows you to build and manage your investment portfolio by buying and selling various investments.
Generally, the money you invest in your RRSP account and the returns on that investment are tax deferred until you cash it out, make a withdrawal, or receive a payment from the plan. In most cases, this should be after retirement.
Locked or unlocked
RRSPs may be either locked or unlocked.
A locked-in retirement account, or LIRA, is similar to a company or government pension plan. Only the employer may contribute money to the account. Pre-retirement withdrawals are not permitted, and post-retirement withdrawals are paid in regular installments, such as an annuity. (Some provinces allow some hard withdrawals.)
An unsecured plan allows withdrawals at any time, with the caveat that you will owe income taxes that tax year.
However, RRSP contributions are made directly to the RRSP issuer.
How often is the RRSP deduction maximum reviewed?
The maximum RRSP deduction is reviewed annually. Generally, the maximum is 18% of income earned in the previous year.
Can I contribute less than the maximum allowable RRSP deduction?
Yes. However, this is a deduction from taxable income, so it is in the taxpayer’s best interest to save the maximum in order to reduce the amount of income subject to personal income tax.
How to set up an RRSP?
Canadian taxpayers can set up a registered retirement savings plan through a financial institution such as a bank, credit union, trust, or insurance company.
Bottom line
The Registered Retirement Savings Plan (RRSP) deduction is the maximum amount a Canadian taxpayer can contribute annually to a savings plan and deduct it from taxable income that year. Generally, the amount is 18% of the taxpayer’s earned income for the previous year, up to an annual maximum. The cap is reviewed annually.
#Registered #Retirement #Savings #Plan #RRSP #Deduction #Overview
