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Retirement savings are essential for all Canadians to live comfortably after they retire. And the earlier you start saving, the better. For newcomers, understanding retirement savings options can be confusing. So in this article, I’ll demystify the Registered Retirements Savings Plan (RRSP). With a clear understanding, you can start saving as soon as possible to achieve your dreams and goals in Canada!
An RRSP is a tax-deferred retirement savings plan. This plan encourages you to save in your earning years so that you can have income in your retirement years.
The term “tax-deferred” means that when you open an RRSP and contribute to it, you can claim a deduction from your income. And any income earned in the RRSP remains tax-free unless you make a withdrawal from your RRSP. In other words, you defer or delay taxes until the time you make any withdrawal. Therefore, you can defer income taxes until later when you may be subject to lower taxes as your income goes down.
During the years when you earn a high income, you are subject to higher tax rates. So, contributing to an RRSP will help you lower your tax liability.
You are eligible to open an RRSP if you satisfy these conditions and you:
You can open multiple RRSP accounts. However, it will be easier to manage one RRSP account rather than tracking several accounts.
You can set up an RRSP through a:
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Computing the maximum RRSP contribution for the current year involves four steps.
STEP ONE:
Calculate 18% of the income you earned in the previous tax year. Add the following income to determine your earned income:
Less: Spousal support payments made.
No other income or capital gains will be considered as earned income for an RRSP.
Now multiply your earned income by 18%.
Visit www.canada.ca to find out the contribution limit for the current year.
In 2024, the website shows that the annual RRSP contribution limit is $30,780 (for tax year 2023).
Compare 18% of your earned income for the previous tax year as computed in step one and the annual contribution limit determined in step two.
Take the lesser of these two amounts.
To the lesser amount that you determined in step three, add unused RRSP contribution room from the previous years that were carried forward to the current year.
Now, subtract the:
Now, you have arrived at your maximum RRSP contribution for the current year. The maximum RRSP contribution is also known as:
If you participate in a registered pension plan or a deferred profit-sharing plan, you earn pension benefits. This is the amount of PA.
In simple terms, PSPA is the amount of extra pension credits you get when either there is:
In a pension buyback, you pay a fixed amount to purchase years of missed pensionable service to enhance your retirement pension. For example, you can miss pensionable service years when in your earning years you:
Thereby losing the opportunity to accumulate years of service in the pension plan.
The amounts of PA and PSPA go on to reduce your maximum RRSP contribution amount for the current year.
Let’s say you want to determine your maximum RRSP contribution for 2023 and you earned:
To compute the maximum RRSP contribution follow these four steps:
Compute 18% of your earned income. In your instance, earned income will be $90,000. Taxable capital gains are disregarded while computing earned income. Thus, 18% of your earned income = 0.18 x 90,000 = $16,200.
On www.canada.ca, you find the RRSP dollar limit for 2023 is $30,780.
Take the lesser of the above two amounts. The lesser amount = $16,200.
To $16,200, add the unused RRSP contribution of $7,000 and subtract your pension adjustment amount of $3,000.
So, your maximum RRSP contribution = $16,200 + $7,000 – $3,000 = $20,200.
Let’s take the above example. Since we worked out that your maximum RRSP contribution is $20,200, this is the maximum that you can contribute in the current year (in this case, 2023).
You contribute an excess amount of up to 2,000 without any penalty. But, any amount beyond $2,000 will be subject to a penalty of 1% of the excess beyond $2,000 for each month (or part of the month) that this excess contribution exists. For example, if your maximum RRSP contribution is $20,200, you may contribute:
$20,200 + $2,000 (excess amount not subject to penalty)
However, if you contribute, say, $23,200, there will be a penalty as computed below.
Split the amount of $23,200 as shown:
1. $20,200. This will not attract any penalty.
2. An excess amount of $2,000 which escapes any penalty.
3. An excess amount of $1,000 (which is beyond the excess amount mentioned in 2 above). This excess of $1,000 will attract a penalty of 1% for every month (or part of the month) that it remains in the RRSP.
Thus, you will pay $10 (i.e. 1% of $1,000) as a penalty for each month or part of the month that this amount remains in the RRSP.
If you make an excess contribution, make sure to withdraw it immediately to reduce the penalty as much as you can. Besides, you are not allowed to deduct from income any excess contribution. It, therefore, helps to avoid making excess contributions in the first place.
Yes, the deadline to make an annual RRSP contribution is typically at the end of February or early March for the preceding tax year. For the 2023 tax year, the deadline to make an RRSP contribution is Thursday, February 29, 2024. Most banks send deadline reminders so that you take advantage of this tax-saving benefit.
If your financial institution goes out of business, the Canada Deposit Insurance Corporation (CDIC) insures up to $100,000 in deposits in seven categories.
The CDIC covers insurance up to $100,000 for the RRSP deposit category. Additional information on this is available at www.cdic.ca.
You can withdraw RRSP funds at any time. But any funds that you withdraw will be added as taxable income for the year that you withdraw funds. In other words, you will not get a tax break when you withdraw funds.
Two plans allow you to withdraw RRSP funds without being subject to taxes or interest:
1. Home Buyers’ Plan (HBP)
2. Lifelong Learning Plan (LLP)
However, both of these plans require you to pay back the amount that you withdraw. You must pay back the funds that you withdraw each year so that the amount that you withdraw for the HBP is paid within 15 years for the HBP and 10 years for the LLP.
When you withdraw RRSP funds for either program you will lose the tax-deferred income that you could have made on the amount that would have remained within your RRSP. Moreover, if you’re unable to pay back the annual dues, they get added to that year’s income and you’ll need to pay taxes on that amount.
While you can withdraw from or register the RRSP at any time, you must deregister it by the end of the calendar year in which you turn 71. At that point, you have three options:
1. Transfer your RRSP proceeds to a registered retirement income fund (RRIF). Click here to learn more about RRIFs.
2. Withdraw the RRSP proceeds and pay taxes on the same in the year that you receive the proceeds.
3. Use the RRSP proceeds to purchase eligible annuities.
A beneficiary is a person your RRSP funds will go to if you die before your RRSP matures. You can name anyone of your choice as a beneficiary of your RRSP. However, from the tax deferral standpoint, it is better to name the following:
Let’s say you make more money than your spouse (or common-law partner) does. And you know that the maximum RRSP contribution limit is restricted by your earned income.
If your spouse makes less money than you do, then the amount they can contribute to their personal RRSP will be lower. However, you’re able to make greater contributions to your own RRSP.
Now if you expect that your spouse’s earnings will continue to be lower than your earnings in the future, it makes sense to contribute more to a spousal RRSP. As well, if you withdraw funds from a spousal RRSP you will pay a lower tax rate on those funds.
Your contribution to the spousal RRSP will be limited by your personal limit. But because you make the contribution, you get to claim this as a deduction.
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In summary, an RRSP can be a great way to save for your retirement in Canada. When you understand the financial benefits of an RRSP you can begin to save sooner and benefit from an early start.
For newcomers, carefully managing your finances is vital especially if you have not yet landed your ideal job. Settlement agencies suggest it can take up to six months to land a job that matches your skills and experiences. In the meantime, carefully managing your budget can reduce stress and financial pressure. Managing your finances will also help you build your Canadian credit history and influence your credit score.
Here, we’ll explore how to create a budget for some of your main expenses in Canada.
So where to start, which is essential to achieving future loans! You need to establish your Canadian credit history because it will be important for many reasons including buying your first home.
An important guiding principle is not how much you earn, but how much you spend. Many Canadians carry too much debt, trying to “keep up with the neighbours”, in other words, buying everything from cars to electronics, even if they can’t afford it. Overspending can catch you in a trap that you want to avoid.
To manage your personal finances, start by preparing a budget with basic expenses like rent and utilities in mind. The cost of living in Canadian cities can vary. Large cities like Toronto and Vancouver are sought-after because they offer the most job opportunities, however, they are also more expensive.
Here are some of the basic expenses to consider when creating your budget:
Housing costs will be the largest monthly expense. Newcomers often rent an apartment when they first arrive in Canada and prices vary depending on the city. Typically, prices for a one-bedroom apartment can range from $700 to $2,500 per month depending on the city.
Before you rent an apartment, visit the building to ensure it’s the right place for you. Determine if it meets your needs and is close to shops, work, and public transit.
Rentals for Newcomers site is a practical and easy-to-navigate site that can help you find housing that meets your unique needs! You can even determine the average costs of rentals in cities across Canada. This is helpful since rental prices change often. You’ll also find helpful articles to help you with your housing search.
Join us for an eye-opening session on how to build your financial future in Canada with confidence. This free webinar is hosted in partnership with Scotiabank, a trusted leader in newcomer banking. Together, we’ll guide you through how the Canadian banking system works and share free tools and strategies to help you plan, save, and invest wisely as a newcomer.
REGISTER FOR THE WEBINARYou will need to budget for the cost of utilities such as electricity (hydro), heating, telephone, cable, and internet. Some apartments include heating and hydro costs in the rent. If you have to pay for electricity, you can ask the landlord what you expect to pay every month. But, your bill will also depend on usage and time of day.
For utilities like internet, cable, and telephone, the best option is to shop for bundles (combined service plans) from different telecom providers in your area. A bundle can cost anywhere between $100 – $150 per month. Or, check out streaming services that are less expensive than cable television.
Cell phone plans range from $15 per month to more than $150, depending on the number of free minutes and text messages and the data usage limits. Voicemail activation usually costs extra. You can start with a basic plan and upgrade according to your needs.
While not a bill per se, the cost of doing laundry will be similar from one month to the next. Apartment buildings come with laundry rooms with coin or card-operated washing machines. A washing cycle costs between $2.25 and $3.50 depending on the length, and a dryer cycle is similar.
Even if you are renting, it’s a good idea to purchase renter’s insurance to protect you against damage and theft. The insurance can cost up to a few hundred dollars a year.
Depending on your province, you may also have to pay health insurance premiums, which vary by province and according to the size of your family. You will also need to factor in the premiums for any private health insurance you may buy.
Public transit is probably the most affordable means of travel. All cities offer affordable travel options such as buses, trains, subways, light-rail trains, and streetcars. A monthly transit pass can cost anywhere between $70 to more than $150 depending on the city and the number of travel routes. In large cities, such as Toronto, the public transit system covers the Greater Toronto Area, and you can easily transfer from one mode of transit to another.
To use public transit, you can purchase individual tickets starting at $3.50, but you can use a transfer at the start of your destination to transfer to different transit modes. In other words, you only have to pay once at the start of your destination. You can also buy transit passes that allow unlimited transit use for a period. Some cities offer an electric fare payment system that allows you to load money onto a card to make travelling easier and at a discounted fare.
You can find specific fare information about public transit in your city by visiting the website of your city government, or the public transit system.
The cost of your food bill will depend largely on your diet, personal standards, and where you live. The stores and supermarkets in popular posh areas are more expensive and will offer more high-quality gourmet and organic products, while cheaper areas will have more low-cost options. Food can set you back anywhere from $100 per week for a single person to several hundred. Cooking at home and planning your meals will balance cost and nutrition.
Personal care items and other supplies can start at $2 at dollar stores, but you may have to compromise on quality. Supermarkets have store brands that are usually cheaper than name brands and, in many cases, of comparable quality.
Again, your personal preferences will determine your clothing budget. You should bring quality items that will last you because clothes shopping is best kept until you find employment. You can pay anywhere from a few dollars for clothing at a cheap retailer or a thrift (second-hand) store to hundreds and even thousands at high-end designer stores.
Movie tickets can cost $10 to $15 depending on the movie and the time of day. Most theatre tickets usually start at $20, and concerts of popular performers can cost well over $100. You can take advantage of local libraries to borrow DVDs and look for community theatres with free performances or performances by donation. It’s important to budget for entertainment, but this may be a personal finance area that you can cut back on if necessary.
Big cities offer great variety and cultural cuisine, so you may want to treat yourself and your family to occasional restaurant outings. The costs can be anywhere from $10 per person at fast-food restaurants, to more than $50 per person at an average restaurant. People usually tip between 15 – 20% of the bill when eating at a restaurant.
Staying fit and healthy should always be a priority. Some rental buildings come with gyms and the price may be very low or included in the rent. If you plan to join a gym, always read the fine print. The monthly cost is usually $60 to $100, but most gyms charge introductory fees and substantial cancellation fees.
Personal care costs also cover the range from basic to luxury. Expect to pay at least $25 for a simple haircut (plus tip) and anywhere from $50 to $70 for a manicure.
If you’ve recently arrived in Canada, managing your personal finances carefully will help you reduce financial stress until you find your first job. And, the strong personal finance habits you follow during your first year in Canada will help you to achieve many of your long-term financial goals.