Saving for Retirement

RRSPs were introduced in 1957 by the federal government to encourage Canadians to save for retirement. Before that, only those who belonged to employer-sponsored registered pension plans could deduct pension contributions from their otherwise taxable income.

For many Canadians, the RRSP is considered to be the foundation of their retirement planning; and contributing to it on a regular basis can bring them closer to a comfortable retirement. By lowering their immediate annual taxable income, and deferring taxes on the RRSP until they retire, Canadians are encouraged to save and invest. Profits on RRSP investments grow tax-deferred and there are various investments available. A tax receipt is received for each contribution, thus reducing the income in the year of the contribution. 

In retirement, many of us will be in a lower tax bracket than during our working years and therefore will ideally pay a lower percentage of tax when we begin drawing an income from our RRSP. 

When can I start contributing to a RRSP?  There is no minimum age for RRSPs. If you are a resident of Canada, earned income in 2012 and filed a 2011 tax return, you can put money into a RRSP up to December 31 of the year you turn 71. 

When must I start withdrawing from my RRSP?  In the year you turn 71, your RRSP must be converted to a RRIF (Registered Retirement Income Fund) or life annuity with the income to start in the following year. 

When is the RRSP deadline?  Friday March 1, 2013 is the last day you can make a contribution to lower your 2012 personal taxable income. However, waiting until the last day is not optimal. For the majority of us, contributing well in advance of that date is best, preferably within the calendar year. Another seamless way to contribute is through monthly RRSP pre-authorized chequing plans. For most of us, investing money monthly is much easier than coming up with a lump sum later. 

The 2012 RRSP limit: $22,970 and 2013 is $23,820. Your individual contribution limit is either 18% of your taxable income or $22,970 – whichever is less – plus any carry-forward amount from previous years. Your personal 2012 RRSP limit is located on your 2011 Notice of Assessment. 

What sorts of investments can be in an RRSP? There is a wide choice here from mutual funds to individual stocks, bonds and GICs. Your decision on what type of investment is based on your time horizon and risk tolerance. 

What is an Over-Contribution? There is a $2,000 lifetime over-contribution limit that can be contributed any time. The $2,000 would not be part of your RRSP tax deduction for the year but certainly adds to your investments and long-term growth for retirement. 

What if I just don't have the cash to make a contribution one year? If you find yourself short of extra cash to make a contribution one year, not to worry. Although previously there was a restriction limiting the ability to carry forward missed contributions for only seven years, that has changed. Now there is no time limit as to how long you may carry forward missed contributions. However, although you may still have the opportunity to catch up on with unused RRSP contribution room, you will have a hard time catching up on the missed "time-value" of money invested. 

Over the last few months, you no doubt have heard that Canadians are not saving enough for our retirement. With many of us living well into our 90s and beyond, putting money into a RRSP is now even more important than before. 

It’s never too early to start investing for your retirement! The sooner you start, the less you will need to put aside. The time value of money plus the power of compounding will be working sooner for you.