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  • Registered Retirement Savings Plan– A Comprehensive Study


    A Registered Retirement Savings Plan is a deferred income fund as the contributions to it are tax deductible and income earned in the plan is not taxed until withdrawn. RRSP contributions made within 60 days after the taxation year end may be deducted in that (preceding) taxation year. For example, to obtain a deduction for 2004, contributions must be made by March 1, 2004.

    Registered retirement savings plans are registered plans into which individuals contribute savings or eligible investments for future use – typically but not necessarily exclusively for retirement. Eligible RRSP contribution amounts reduce taxpayer’s taxable income and thus save tax.

    RRSP has the following salient features:
    The administration costs are affordable
    Any taxpayer 69 years or younger who has earned income, may contribute to an RRSP.
    Contributions may be made on behalf of and by the taxpayer’s spouse, provided that the spouse is under the age of 69
    A self directed RRSP enables the taxpayer to control the funds and make investment decisions within the plan
    If the taxpayer is a member of an RPP or DPSP, he/she still be able to participate in an RRSP, with limitations
    An RRSP allows for direct transfer of funds from RPP’s, DPSP’s, death benefits and retirements allowances and
    Taxpayer may withdraw up to $20000 to purchase a home before October 1st of the year following the withdrawal.
    An individual can withdraw up to $10000 in any one year but $20000 in total from their RRSP to finance either their or their spouse’s (including common-law partners) education. The repayment period is set at 10 years and beings at the earlier of second year after the last year the student was enrolled in full time studies and the fifth year after the first year of an LLP withdrawal
    To avail the benefit from the tax deferred compounding income inside an RRSP; many taxpayers take advantage of the $2000 penalty exclusion amount by purposely over contribution $2000 to their RRSP’s.
    A taxpayer may withdraw all or a portion of the funds from his or her RRSP at any time. There is no age restriction. However individuals can not hold an RRSP after December 31 of the year that they turn 69.

    The RRSP contribution limit is 18 percent of the previous year’s earned income, less the previous year’s pension adjustment as reported on the T4 (employment income slip). The definition of earned income includes:
    Employment earnings, net of union dues and employment expenses
    Research grants (net of related expenses)
    Net income from self employment and active partnership income
    Disability pensions under the C/QPP
    Net rental income
    Alimony or separation allowances received
    Employee profit sharing plan allocations and
    Supplementary unemployment benefit plan payments (excluding Employment Insurance)

    The current year’s loss from self employment or an active partnership
    Deductible alimony and maintenance payments
    Current year rental losses

    The maximum annual contribution has been increased to $14,500 in 2003. That ceiling is scheduled to increase again in each of the next three years – to $15500 in 2004, $16500 in 2005 and $18000 in 2006 after which the maximum annual contribution will be indexed to the average wage growth.

    Taxpayers can contribute to their own RRSP, a spouse or common law partner’s RRSP, or both provided they do not exceed their maximum deductible amount. Spousal contributions become the spouse/common-law partner’s property. Although spousal contributions reduce the contributor’s RRSP limit, they do not affect the recipient spouse’s contribution limit for their own RRSP.

    Contributions to RRSP can be carried forward for deduction in a future period when you have income placing you in a higher tax bracket provided all personal tax credits are availed before deducting RRSP contributions.

    RRSP should not have foreign content of more than 30 % otherwise RRSP will be charged a one percent penalty tax for every month that your foreign content exceeds the limit of its book value. It is always advisable to keep the foreign content below 30% to be on safer side.

    Over-contributions to RRSP in excess of $2000 are assessed a penalty of one percent per month.

    Home Buyers’ Plan:
    Taxpayer may withdraw up to $20000 to purchase a home before October 1st of the year following the withdrawal. Withdrawals are made using Form T1036. An ordinary RRSP contribution made less than 90 days before a withdrawal can not be deducted.

    To participate, prospective home buyers or their spouses/common-law partners cannot have occupied a home as a principal residence at any time from the beginning of the fourth calendar year before the withdrawal year to 31 days before the withdrawal. For example, those who wish to withdraw in 2003 must not have owned a home after 1998.

    Repayments are required annually and commence the year following the acquisition. Amounts paid within 60 days of a year end can be used as a repayment for the preceding year. The maximum time allowed for repayment is 15 years, and each repayment must be at least 1/15 of the borrowed amount. If during a particular year an individual does not repay the scheduled amount or repays only part of it, the unpaid portion will be included in their income for that year.

    No interest is paid by the RRSP annuitant who has withdrawn funds under the Home Buyer’s Plan.
    RRSP Education Withdrawals
    Taxpayers are able to withdraw money from their RRSP for qualifying full time education and training for either themselves or their spouse/common-law-partner, but not both at the same time, on a tax free basis. This is known as the LIFE LONG LEARNING PLAN (LLP)

    Under the LLP, withdrawals may not exceed $ 10000 in a year and $ 20000 over a four year period. Tax payers can participate in the plan as many times as they wish but may not start a new plan before the end of the year in which all repayments are made for previous withdrawals. Withdrawals are generally repayable in equal instalments over 10 years, commencing no later than 60 days after the fifth year following the year of the first withdrawal (or sooner if the student fails to remain in the program full time).

    Withdrawals can also be repaid earlier than required. Amounts that are not repaid as scheduled will be added to income.

    WHY START PLANNING NOW? (As per Statistics Canada)

    People are retiring earlier and living longer
    You may be retired for as long as your working years
    Cost of retiring early increases exponentially
    No guarantee government plans will provide sufficient retirement income
    Savings more now can make a huge difference in your retirement income later. ‘
    Immediate tax savings
    Low cost of borrowing
    Use tax refund to pay off all or a portion of your RRSP Loan
    Take advantage of unused RSP contribution room (even your spouse/common-law partner if they are in lower tax bracket)

    1. GROWTH – focuses on earnings, less focused on price
    2. VALUE – focuses on price, longer holding period
    3. BLEND – focused on growth at a reasonable price (GARP)
    4. MULTI-MANAGED – fund of funds approach, best of class managers

    Please remember to do following:
    1. Try to contribute monthly as compounding will make it grow faster and secondly the volatility of buying price will average out.

    2. Try to participate in RPP of your employer as most of the reputed Canadian employers contribute also for your retirement plans (additional remuneration for future – It does not sound great for you)

    3. Merge all your RRSP investments under one professional person who understands your investment, financial planning but expert of tax and finance as well

    4. Go for spousal RRSP if your spouse is in low tax bracket or not employed. This helps in case you need an emergency withdrawal, it will be taxed in hands of spouse who is either not taxable or in low tax bracket. Theses withdrawals are to be made after three years. Up to three years it will be added to your income instead of spouse or common law partner.

    5. Diversify your RRSP among the various style of funds – growth, value, balanced, foreign funds etc

    6. Do not over invest in foreign funds over the permissible limits
    7. Take full advantage of RRSP withdrawals for home purchase. New Immigrants this is very special benefit for you. Start early planning for easy settlement and gains 

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