Hello everyone,
Have you contributed to your Registered Retirement Savings Plan (RRSP) for the 2024 tax year? It is not too late to do so. The RRSP is a government-regulated program that allows you to accumulate funds for your retirement while saving on taxes.
In general, any income earned within the plan is tax-free as long as the funds remain in the account. Additionally, you can deduct your RRSP contributions from your annual taxable income.
For many, the RRSP represents an important source of retirement income. By investing in your retirement savings plan, you are investing in your future. You have until March 3, 2025, to do so.
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What is the maximum contribution amount?
The contribution limit for the 2024 tax year is $31,560. However, the amount you are entitled to contribute cannot exceed 18% of your earned income (excluding pension and investment income) from the previous year.
For example, if you earned $80,000 in 2023, your maximum contribution amount for 2024 will be $14,400. However, if you are a member of a workplace pension plan, your limit may be reduced by the pension adjustment factor.
If you have not contributed the maximum amount to your RRSP in previous years, it is very likely that you have unused contribution room, which increases your maximum allowable amount.
To find out how much you can invest this year, you can either consult page 3 of your latest federal Notice of Assessment, access My Account on the Canada Revenue Agency (CRA) website, or call the CRA directly.
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A deduction on your tax return
One of the advantages of the RRSP is that it allows you to grow your money tax-free. Additionally, you can deduct your contribution amount from your total income and thus reduce your taxable income.
Funds invested in an RRSP become taxable upon withdrawal. That is why it is recommended to withdraw funds from your RRSP only once you retire, when your marginal tax rate is generally lower.
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Planning to buy your first home
If you are planning to buy your first home, the RRSP can become an interesting option. The Home Buyers’ Plan (HBP) allows you to use your RRSP as a down payment, without paying taxes on the withdrawal.
The maximum withdrawal that can be made from the RRSP under the HBP is now $60,000. To qualify, you must be considered a first-time homebuyer and become the owner of this primary residence before October 1 of the year following your withdrawal.
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Going back to school
If you want to return to school, there is a program called the Lifelong Learning Plan (LLP). Similar to the HBP, this program allows you to withdraw funds tax-free from your RRSP to finance your education, your studies, or those of your spouse.
• Maximum amount that can be withdrawn: $10,000 per year
• Total limit: $20,000
To benefit from the LLP, you or your spouse must be enrolled full-time in an eligible educational program.
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RRSP vs. TFSA
Since the introduction of the TFSA in 2009, many people wonder which vehicle between the RRSP and the TFSA should be prioritized. Several factors may come into play, requiring a rigorous analysis before making a contribution to one or the other of the two plans.
• If your marginal tax rate in retirement is lower than your marginal tax rate at the time of contribution, you should opt for the RRSP.
• The TFSA is more flexible, as withdrawals are not taxable and contribution room is recoverable the following year.
• An RRSP contribution reduces net family income, making you eligible for certain tax credits.
If you plan to use your funds for short- or medium-term projects, it is better to prioritize the TFSA. However, if funds are intended for retirement, the RRSP remains a relevant choice, especially if your current marginal tax rate is higher than what is expected in retirement.
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Lower Your Annual Income to Benefit from Various Tax Credits
If you have received a salary increase, you may lose certain federal or provincial tax credits.
For example, an increase of $1,000 in your annual income could cause you to lose almost the same amount in tax credits. It may therefore be advantageous to invest this surplus in your RRSP to lower your annual income and thus benefit from these programs or, at the very least, not lose them.
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Spousal RRSP
A spousal RRSP allows you to split your retirement income. By contributing a portion of your eligible contribution to your spouse’s RRSP, you reduce your own maximum deductible amount.
• The contributed amounts belong to the beneficiary spouse, but if a withdrawal occurs within three years, the contributor will be taxed.
• There is no possibility of transferring funds from an individual RRSP to a spousal RRSP.
• Contributions are allowed until the age of 71.
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Borrowing to Contribute
It is possible to take out a loan to invest in an RRSP, a strategy known as leverage. This option must be carefully evaluated, as interest on the loan is not tax-deductible.
It is often more advantageous to set up a savings strategy to contribute to your RRSP rather than borrowing. However, if the loan is repaid quickly, the immediate tax savings may offset the cost of interest.
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Excess Contributions and Penalties
If you contribute more than your maximum deductible amount to an RRSP, you may be subject to penalties. However, there is a $2,000 over-contribution margin without penalty. Beyond this amount, a tax of 1% per month will apply to the excess as long as it is not withdrawn or until you accumulate enough new contribution room to absorb it. It is therefore crucial to check your contribution limit before making a deposit into your RRSP.
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Eligible Investment Options in an RRSP
Funds invested in your RRSP can be placed in several investment vehicles based on your risk profile and retirement goals. Here are the eligible investments:
• Mutual funds
• Individual stocks (publicly traded securities)
• Government or corporate bonds
• Guaranteed Investment Certificates (GICs)
• Income trusts and Exchange-Traded Funds (ETFs)
• Annuity contracts
Optimizing your RRSP involves proper diversification of your investments. Consulting a financial advisor may be a wise decision to align your investments with your retirement horizon and risk tolerance.
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Early Withdrawals and Taxation of Withdrawals
Withdrawing funds from your RRSP before retirement can have significant tax consequences. Any withdrawal will be added to your taxable income for the current year, which could push you into a higher tax bracket. Additionally, a withholding tax will automatically be deducted by your financial institution based on the amount withdrawn:
• 10% (5% in Quebec) for a withdrawal of $5,000 or less
• 20% (10% in Quebec) for a withdrawal between $5,001 and $15,000
• 30% (15% in Quebec) for a withdrawal over $15,000
If your actual tax rate is higher than the withholding amount, you may have to pay additional tax when filing your tax return. It is therefore recommended not to withdraw funds from your RRSP before retirement, except in specific cases such as purchasing a first home through the HBP or returning to school with the LLP.
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Income Splitting After Age 65
Starting at age 65, income from a Registered Retirement Income Fund (RRIF) or an annuity from an RRSP can be split with your spouse. This mechanism helps balance the couple’s taxable income and thus reduce overall tax liability.
For example, if one spouse has a high pension income and the other has little or no income, transferring up to 50% of this income to the other spouse can allow for a lower tax rate and prevent the loss of certain low-income tax credits.
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Deferring a Contribution for a Future Deduction
If your current income is lower than what it will be in a few years (for example, if you are at the start of your career), you can contribute to your RRSP without immediately claiming the tax deduction. This allows you to defer this deduction to a year when your income is higher, maximizing your tax savings.
This strategy is particularly useful for those expecting a significant salary increase in the coming years or who anticipate variable income.
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RRSP Contributions and Conversion After Age 71
If you turn 71 in 2024, it is essential to know that you can still contribute to your RRSP until December 31, 2024. After this date, you must convert your RRSP into a Registered Retirement Income Fund (RRIF) or an annuity.
If you still have employment income in 2024, a good strategy is to make one last RRSP contribution before conversion, even without immediately claiming the tax deduction. This allows you to use this deduction in a future year when your tax rate may be higher.
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The FHSA: An Alternative to the HBP for Home Purchases
Since April 2023, the First Home Savings Account (FHSA) has become an interesting alternative to the Home Buyers' Plan (HBP).
The FHSA combines the benefits of both RRSPs and TFSAs:
✔️ Tax-deductible contributions, like an RRSP
✔️ Tax-free withdrawals for a first home purchase, like a TFSA
✔️ No repayment required, unlike the HBP
You can contribute up to $8,000 per year, with a lifetime limit of $40,000. If you do not contribute the maximum amount in one year, you can carry forward the unused room to the following year.
Unlike the HBP, where withdrawn funds must be repaid over 15 years, FHSA withdrawals are final and do not affect your future contribution room. This account is therefore an ideal option for those planning to buy a home within the next 5 to 10 years.
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Maximize Your RRSP with Our Experts
The RRSP is a powerful tool for building tax-sheltered capital and optimizing your financial planning.
Our experts are available to help you manage your investments and develop a strategy tailored to your goals. Whether you want to optimize your taxes, prepare for retirement, or finance a medium-term project, we are here to guide you.
Contact us today for personalized support.
