Registered savings plans 101
If you’re thinking about a career in the Canadian financial services industry, you’ll likely need to take at least a few courses. Even if you have some experience in the industry, the first course we recommend for new professionals is the Canadian Investment Funds Course.
In that course, you’ll start to learn about registered savings plans. This overview will help get you started on the topic.
Registered retirement savings plan
When someone decides to save money in a registered account of any type in Canada, there’s a good chance they’re doing so to save for a specific goal, but also for the tax benefits. The kind of account they need will depend on what they’re saving for.
One of the most common types of registered accounts is the Registered Retirement Savings Plan (RRSP). The intent of an RRSP is to allow investors to save for their retirement on a beneficial tax basis. When investors make contributions to their RRSPs, they can deduct these amounts from their income, effectively reducing the amount of income they have to pay tax on. There are limits to how much one can contribute to an RRSP each year. These limits are based on an individual’s earned income and the maximum contribution limit for the year.
Similarly, the income they earn inside of their RRSP is tax-deferred until they withdraw funds from the plan. Taxes become due on the full amount of the withdrawal when the funds are taken out of the RRSP. This usually happens in retirement, when their income tends to be lower and they’ll pay less tax than when they’re working.
There are two circumstances in which a person can withdraw their funds before retirement without penalty: under the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).
The HBP allows first-time home owners to withdraw up to $25,000 from an RRSP to buy a qualifying home, or to buy a home for someone with a disability. (The home they buy must be their principal place of residence.) The withdrawn funds must be repaid over a 15-year period.
The LLP allows people to withdraw funds from their RRSP to pay for full-time education for themselves or their spouse or common-law partner. The LLP is not available to help people finance training or education for their children. The amount withdrawn must be repaid over a period of 10 years.
Other registered plans
Besides RRSPs, Canadians can take advantage of other registered accounts such as Registered Retirement Income Funds (RRIF), Registered Education Savings Plans (RESP) or Tax-Free Savings Accounts (TFSA).
A RRIF is an account used to convert RRSPs into retirement income. A person’s RRSP assets are placed into a RRIF when the time comes to use that money for retirement spending. Although withdrawals are fully taxed, any money that stays within the RRIF continues to be sheltered from tax.
Contributions to a TFSA or an RESP are made using after-tax dollars, meaning these amounts cannot be used to lower income for tax purposes.
An RESP is an account used for saving for a child’s post-secondary education. The income withdrawn from an RESP is taxed “in the child’s hands,” meaning the funds are taxed using the child’s (usually lower) income tax rate.
Finally, the TFSA allows Canadians to earn income and capital gains on a tax-free basis. The amount they earn inside the TFSA is not taxable when they withdraw it.
If you’d like to learn more about registered savings plans, start exploring our courses today.