Frequently Asked Registered Retirement Savings Plan (RRSP) Questions
- 1. Can I invest in an RRSP on my own?
Yes, if you prefer to manage your own investments you can set up a self-directed RRSP at a financial institution. In this case you will be responsible for making your own investment decisions. Any contributions you make to your RRSP must be made directly to the financial institution or the issuer of your RRSP.
- 2. Do I need a financial advisor to invest in an RRSP?
Although you do not require a financial advisor to invest in an RRSP, they can provide assistance in selecting the most appropriate investments to maximize your returns; help you set your retirement goals; and ensure you are on track to achieve them.
- 3. How many RRSP accounts can I have?
There is no limit on the number of RRSP accounts you can have. However, your total contribution cannot exceed your eligible contributions.
- 4. What are the benefits of investing in an RRSP?
There are two main benefits of investing in an RRSP.
(i) Contributions are tax deductible
You can deduct your contributions from your income on your tax return, saving on taxes in the year you make the deduction. If your income is lower in a particular year, you can carry forward the contribution deduction to a future year when your income is higher.
(ii) Income and gains are sheltered from taxes
When you invest your RRSP contributions, you do not have to pay taxes on any investment income or capital gains earned on your investments as long as they remain in your RRSP. This allows your savings to compound tax-free in your RRSP.
- 5. What investments can I hold in my RRSP?
You can invest your RRSP contributions in a variety of different investment products which are referred to as qualified investments. Among these investments are cash and cash equivalents such as guaranteed investment certificates, mutual funds, exchange traded funds, equities, bonds, gold and silver bullion, mortgages, rights, warrants and put and call options of stocks listed on a public exchange, and annuities issued by a licensed provider.
- 6. What are the benefits of holding mutual funds in my RRSP?
Mutual funds invest in diversified pools of different types of investments such as equities and fixed-income securities across many different sectors and regions. They are professionally run by a fund or portfolio manager. By investing in mutual funds you can select a mix of funds that can help you meet your retirement goals, such as equity funds for growth and fixed income funds for income, or take a balanced approach to obtain both income and growth. Whether you are an aggressive, moderately aggressive or a conservative investor, you can find funds that match your risk profile, making them an ideal choice when investing for retirement.
- 7. How do I decide which mutual funds I should invest in?
Your financial advisor can help you select the most appropriate funds that match your risk profile and investment objectives. Unless you are an experienced advisor, it is generally advisable to use a financial advisor to help you choose suitable funds. If you are investing on your own, you can conduct independent research on websites such as Morningstar Canada or Globefund which rank mutual funds using a variety of different variables.
- 8. How much can I contribute to my RRSP?
Generally, you can contribute 18% of your previous year’s earned income to your RRSP subject to a maximum of $24,930 in 2015. However, if you did not exhaust your entire RRSP contribution limit for the years 1991 to 2014, you can carry forward any unused amount to 2015.
The maximum amount you can contribute to your RRSP is stated on your most recent Notice of Assessment issued from the Canada Revenue Agency (CRA). You can also contact the CRA to verify the amount you can contribute.
- 9. What is earned income for RRSP purposes?
Earned income includes the total of income received from employment, income from a non-incorporated business, income from rental of real property, royalties and alimony received less the total of losses from a non-incorporated business, losses from rental of real property and alimony paid. Earned income excludes pension income, retiring allowances, investment income, and income earned while a non-resident of Canada.
- 10. Can I over-contribute to my RRSP?
You can make a lifetime over-contribution of $2,000 without incurring any penalty. However, you will not be allowed any tax deduction on over-contributions. The benefit of the over-contribution is that any income or gains derived will be sheltered from taxes until you retire. Any over-contribution exceeding $2,000 will be subject to 1% per month penalty until it is withdrawn from your RRSP.
- 11. Should I make lump sum or periodic contributions?
When you make periodic contributions to your RRSP, your contributions will grow tax-free throughout the year, compared to making a lump sum investment at a specific point in time. Periodic contributions can also allow you to benefit from dollar-cost-averaging, which means that you can acquire your investments at different prices throughout the year due to market fluctuations. Typically, the average cost of your periodic investments can be lower than if you made a lump sum investment at a specific point in time.
- 12. When is the deadline to contribute to my RRSP?
You can contribute to your RRSP at any time as long as you have contribution room available. However, in order to claim a tax deduction for a given year, you must contribute to your RRSP within the first 60 days of the following year.
- 13. Can I use the funds in my RRSP for any other purpose?
You can temporarily withdraw or borrow funds from your RRSP to buy your first home (Home Buyers' Plan) and to pursue your educational goals (lifelong learning plan). You should consult your financial advisor or financial institution about the rules for withdrawing funds from your RRSP.
- 14. Can I borrow to invest in my RRSP?
Yes, you can borrow to invest in your RRSP. However, the interest on the loan is not tax deductible.
- 15. What happens if I have to take out money from my RRSP?
You can withdraw money from your RRSP at any time. However, the amount withdrawn must be added to your taxable income in the year you make the withdrawal. The amount withdrawn would therefore be taxed at your current marginal tax rate.
- 16. What happens when I retire?
Normally, when you begin to withdraw funds from your RRSP in retirement, you will likely be in a lower tax bracket than during your income earning years. The funds withdrawn at that time may then be taxed at a lower tax rate. You can also transfer your RRSP savings tax free into a Registered Retirement Income Fund (RRIF) or an annuity when you retire. You'll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracket in retirement, you’ll pay less taxes.
Contact your financial advisor for more information on RRSP investing with Excel Funds!