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Winter 2005 |
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F i n a n c i a l
Registered
Retirement Savings Plans
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Submitted Photo |
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A Registered Retirement
Savings Plan is a tax-deferred savings plan that is "registered"
with the federal government.
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By Tammy Osborne |
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A Registered Retirement Savings Plan (RSP)
is a tax-deferred savings plan that is "registered" with the federal
government. Income earned within the plan is not taxed; however, any
withdrawals from the plan will generally be subject to tax. Also,
your RSP contributions can be deducted (up to your RSP contribution
limit) on your tax return.
An RSP allows you to defer paying taxes on
retirement savings during your prime income-earning years. You can draw
on your RSP after retirement, when you are presumably in a lower tax
bracket.
RSP contributions can be claimed in the
year they are made, or in a later year. This can be beneficial if your
income was low in the year you made the contribution, and you expect it
to increase in future years. Claiming an RSP deduction in years where
you are in a higher tax bracket will produce greater tax savings.
The tax savings you realize by making an
RSP contribution are based on your marginal tax bracket. For example, if
you are in a 45 per cent tax bracket, a $10,000 contribution could save
you $4,500 in taxes. Personal income tax rates will vary according to
your province of residence and income level.
You can contribute 18 per cent of your
previous year’s earned income (up to a maximum of $16,500 for 2005 based
on a prior year earned income level of $91,667), plus any unused
contribution room from previous years, less any pension adjustment. The
maximum RSP contribution limit for 2006 is $18,000. The annual
contribution limit will increase to $19,000 for 2007, $20,000 for 2008,
$21,000 for 2009 and $22,000 for 2010. The annual RSP contribution limit
will be indexed for inflation beginning in 2011. If you do not maximize
your RSP contributions, any unused contribution room can be carried
forward indefinitely and accumulated for future years. Also, don’t
forget that RSP contributions you make during the first 60 days of 2006
can be deducted on your 2005 personal income tax return, provided you
have the available contribution room.
Earned income includes, but is not limited
to, salary from employment, self-employment business income and net
rental income. It does not include certain types of income such as
investment income, limited partnership income, taxable capital gains, or
Registered Retirement Income Fund (RIF) income. The calculation of
earned income can often be complex and the above discussion does not
include all the potential adjustments that may be required. Refer to
your Notice of Assessment, issued by the Canada Revenue Agency, for
their calculation of your prior year earned income. Your RSP
contribution maximum will also be indicated on the assessment.
Virtually any investment can be held in an
RSP, including mutual funds, GICs (guaranteed investment certificates),
stocks, and bonds. Prior to 2005, only 30 per cent of the cost amount of
all property held by your RSP could be invested in foreign property.
This limit was eliminated in the 2005 federal budget allowing you more
scope to maximize the foreign content in your RSP.
A spousal RSP is a retirement savings plan
registered in your spouse’s name and is commonly used for purposes of
income splitting. If your spouse earns less income than you do, you can
contribute to his or her plan, as well as your own, and still get the
RSP tax deduction as long as the total of both contributions does not
exceed your RSP contribution limit. The real benefit is realized at
retirement when the funds are withdrawn from the spousal plan. Your
spouse will be taxed on the funds instead of you, therefore allowing
that withdrawal to be taxed at your spouse’s graduated tax rates. Note
that the funds must be retained in the spousal RSP until the third
calendar year after your last contribution to any spousal plan, in order
to ensure that your spouse — and not you — will be taxed on any
withdrawals.
Tammy Osborne is a financial consultant
with MD Management’s Newfoundland and Labrador office.
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