The beginner’s guide to the challenge of RRSPs

The Ritcey Report

Written by Lynn Healy-Goulet
February 28, 2017

Startling though it may sound, statistics prove that only one in every two Canadians has an RRSP. That’s why I’m calling this blog a beginner’s guide. I hate to say it, but an awful lot of Canadians are just that: RRSP beginners. That’s a shame. Here’s why.

RRSPs allow you to contribute towards funding your retirement, a vital financial issue. Contributing to an RRSP has two main benefits, and they’re both important:

  1. Your contribution is tax deductible.
  2. Your contributions grow tax sheltered inside your RRSP. As a result, they have the potential to grow at a much faster rate than funds saved outside an RRSP.

Who can contribute to an RRSP? Simple. Anyone. If you are the age of 71 or under and have earned income in the previous year, then you are eligible for an RRSP. Your maximum contribution limit is 18% of your previous year’s earned income up to the maximum level for that year.

The schedule of maximum contribution limits is capped at $25,370 for the year 2016. This means that if you have earned income of $140,944 and over, you can’t contribute more than $25,370. Below is a table of how different levels of earned income can contribute and the tax savings that contribution will generate:

Income Contribution Tax Savings
$60,000 $10,800 $3,561
$91,666 $16,500 $6,728
$100,000 $18,000 $8,354
$105,556 $19,000 $8,818
$111,111 $20,000 $9,282
$116,667 $21,000 $9,746

There are a number of eligible investments for an RRSP. If you have a self-directed RRSP, these investments can include guaranteed investment certificates (GICs), shares of Canadian companies listed on a recognized Canadian stock exchange, bonds, treasury bills, mutual funds, eligible foreign investments, and more.

What I have summarized here are the basics. For a more nuanced, sophisticated approach, especially one that takes into account your long term retirement planning, contact us today.