The Frugal Canadian

A frugal spender seeks to find new ways to save money and increase her net worth.

Sunday, January 29, 2006

One Month Left for RRSP Contributions

If you haven't already contributed to your RRSP this year, you have until March 1st to get the deduction on your 2005 tax return. For those of you that are just starting out here's some info for you:

What an RRSP gets you
- A deduction on your tax return which lowers your income by the amount of your contribution
- Tax Deferred Growth on your Investments. While invested in your RRSP you do not pay tax on the income the plan generates.

Where to get one
- Banks, Credit Unions, Brokerage Services
- You can walk into your bank and tell them you want to contribute to your RRSP. Even if you’re not sure what you want to invest in at that moment, you can make the contribution in cash and decide later how to invest it. This is commonly referred to as “parking” your RRSP.

Eligible Investments
- Cash, GICs, mutual Funds, ETFs, stocks, bonds, trusts

How much Can you Contribute
- Each year you can contribute up to 18% of your prior year’s Earned Income, subject to a maximum of $16,500
- You can find this amount on your 2004 Notice of Assessment from Canada Revenue Agency(the letter CRA sends after you file your tax return)
- If you cannot find this form, you can call CRA at 1-800-959-8281 to find out your limit. You will need your SIN, date of birth and line 150 of your prior tax return before they will release information to you

Withdrawals
- Any amount taken out of your RRSP is taxed 100% as income regardless of the type of income. Your bank will issue you a T-slip which you will need to report on your return
- Tax is withheld at source but depending on your tax bracket, you may have to make additional tax payments when you file your tax returns

Withdrawal Exceptions
- You can withdraw up to $20,000 on your RRSP under the Home Buyers Plan and Lifelong Learning Plan(annual limit of $10,000)
- You have to pay these amounts back over a number of years – HBP(15 years), LLP(10 years)

Borrowing Money to Contribute to your RRSP – Points to Consider:
- The interest incurred on your loan is NOT tax deductible
- For a $1 contribution you in almost all cases will NOT get a $1 refund. This means, if you contribute $10,000 you will not get a $10,000 refund.
- Do you have the ability to repay? What tax bracket are you in?

2 Comments:

At 9:24 AM, Blogger Will Slade said...

Hi,

Do you have a good resource online as an FAQ for RRSPs? I'm going to contribute for the first time this year, and I'd like to know what my options are, especially with regards to a self-directed RRSP.

Thanks,
W

 
At 1:07 PM, Blogger The Frugal Canadian said...

I think your main focus should be on contributing to your RRSP before the deadline. You can do this easily by visiting your bank and making the contribution in a money market fund or other cash product. After you've contributed you can then look at asset allocation and account options and transfer funds between institutions if needed.

I'm currently in the process of setting up a website devoted to personal tax help but it is still in the development stages. If you're looking for technical info you can check out http://www.cra-arc.gc.ca/tax/individuals/topics/rrsp/menu-e.html

This isn't going to give you a lot of details on what type of investment options you have.

Generally speaking if you're interested in setting up a self-directed RRSP, many of the banks charge a yearly fee of $100 if the balance is less than $25,000. This can really eat into returns if you're just starting out. You can visit the major banks site and look at their discount brokerage options. Since you're just starting out you need to be weary of full service accounts which will eat up your return.

Hope that helps

 

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