No, it’s not RSP season. So, now is the perfect time, without all the marketing and high-pressure sales tactics, to step back and plan the best way to invest for your retirement.
Before you decide between contributing to a RSP or a TFSA, make sure you understand the facts:
Retirement Savings Plans (RSP)
- These are registered by CRA and are designed to encourage us to save for retirement.
- RSPs can contain investments such as stocks, bonds, mutual funds, ETFs, GICs, and savings accounts.
- Contributions are tax deductible based on your marginal tax rate when you put the money in. So, if you make $100,000 a year, your marginal tax rate is 43.41%. This means if you put $1,000 in an RSP, you’ll get about $430 “back”. If you make $30,000 a year, the same $1,000 contribution will get you about $200 back with your 20.05% marginal tax rate (in Ontario).
- You defer paying tax on the money and any interest it gains until you withdraw it, presumably in retirement. When you withdraw the money, it is considered income and you will pay taxes on it according to your marginal tax rate at that time.
- You are allowed to contribute up to 18% of your previous year’s income to your RSP, up to a maximum of $26,010, for 2017. This is adjusted if you have an employer pension. Any unused room is carried forward indefinitely. Check last year’s Notice of Assessment to see how much room you have available. You’ll pay a penalty if you over contribute.
- No starting age limit – anyone that has earned income and filed a tax return can contribute to a RSP the following year.
- RRSPs need to be converted to a RRIF by the end of the year you turn 71. Then, RRIF owners must withdraw a certain amount each year.
Tax-Free Savings Accounts (TFSA) Continue reading