What is an RRSP? And what are the rules?

A Registered Retirement Savings Plan (RRSP) is, as the name suggests, a plan that is registered with the Canada Revenue Agency (CRA) to allow Canadians to save for retirement. They can be set up by a Financial Planner and by most financial institutions.

You can think of an RRSP as a special kind of "box" designed to hold tax-deductible investments in a registered account so they can grow tax-free until they're withdrawn. You can have as many RRSPs as you want, although it is better to have fewer for ease of management and to minimize any fees.

Since RRSP contributions are tax-deductible, they are more valuable to clients with higher incomes. Once inside the tax-sheltered RRSP "box," the investments can grow faster than they would outside an RRSP, where they would face tax on their gains.

You can chose a wide variety of investments for your RRSPs - cash, GICs, mutual funds,¹ bonds, exchange-traded funds, mortgage-backed securities, stocks, labour-sponsored funds and income trusts that invest in everything from oil and gas to peat moss and real estate. You can opt to put up to 30% of your RRSP investment into foreign investments.

To hold some kinds of investments, you'll need to have a self-directed RRSP. This does not mean you have to manage everything yourself. It is just a name for an RRSP that can hold multiple kinds of investments - a good way to diversify your investments and lower risk.

If you do not have cash to make a contribution, you can arrange a contribution-in-kind. If you hold securities or Canada Savings Bonds outside your RRSP and do not want to sell them, you can put them directly into your RRSP and get a tax deduction for their current value. Note: if the security has increased in value from when you bought it, you must declare a capital gain but if it has decreased in value, you ca not claim a capital loss.

You may have heard that you should "pay yourself first" - in other words, it is easier to put $200 a month into an RRSP than to come up with $2,400 at the end of the year. Monthly installments also allow you to dollar-cost-average your purchases - for example, the same $200 will buy more units of a mutual fund when unit prices are low, and fewer units when prices are high.

You can continue to contribute to an RRSP until the end of the year in which you turn 71, provided you still have earned income. At that time, you must convert your RRSP into a Registered Retirement Income Fund (RRIF) (the most popular option), buy an annuity, or withdraw it in cash.

You should consult a Financial Advisor about what type of RRSP investments are right for you. If you do not have a company pension plan or are nearing retirement, you may want to be more conservative. Ultimately, the choice is yours. A Financial Advisor will help you to assess your risk tolerance and make the appropriate choices.

What is the Deadline for RRSP Contributions?

The deadline for RRSP contributions is midnight on March 1st or February 29th in a leap year, if you want the tax break applied to your previous year's income. However, you can carry forward unused RRSP contribution room to next year.

The thing about an annual carry-forward, of course, is that they can quickly mushroom into a mountain of room that will stay unused unless you win a lottery or get an inheritance. For example, if you were unable to contribute $2,000 this year, will you be able to find $4,000 to contribute next year, or $6,000 the year after that? You do have the option to borrow for your RRSP contribution.² There are a wide variety of RRSP loans and Lines of Credit available. Your advisor can help you decide if this option is right for you.

How Much can I Contribute?

To find your RRSP contribution room for any given year, check your CRA Notice of Assessment for the previous year. Your Financial Advisor can help you plan and stick to a regular contribution schedule.

¹Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

²Borrowing to invest involves greater risk than investing using cash resources only. If you borrow money to invest, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the investment declines