What Is a Registered Retirement Savings Plan Deduction?
Registered Retirement Savings Plan Deduction is the amount that a Canadian taxpayer contributes to his or her RRSP. This amount can be deducted from the taxpayer's annual income to arrive at his or her taxable income for the year. Contribution limits can be determined by filling out Form T1028, which is available online.
Understanding the RRSP Deduction
The RRSP deduction amount is found on line 208 of the annual income tax return filed with Canada Revenue Agency. As this is a tax deduction from personal income, it is advantageous for taxpayers to maximize the value of their RRSP deduction in order to minimize the amount of money that is subject to personal income tax.
How RRSPs Work
Canadian taxpayers set up a registered retirement savings plan through a financial institution such as a bank, credit union, trust, or insurance company. Your financial institution will advise you on the types of RRSP and the investments they can contain, a Canadian government website notes.
"You may want to set up a spousal or common-law partner RRSP. This type of plan can help ensure that retirement income is more evenly split between both of you. The benefit is greatest if a higher-income spouse or common-law partner contributes to an RRSP for a lower-income spouse or common-law partner. The contributor receives the short term benefit of the tax deduction for the contributions, while the annuitant, who is likely to be in a lower tax bracket during retirement, receives the income and reports it on his or her income tax and benefits return.
You may want to set up a self-directed RRSP if you prefer to build and manage your own investment portfolio by buying and selling a variety of different types of investments. For more information on eligible investments, see Self-directed RRSPs. If you are considering this type of RRSP, be sure to consult with your financial institution. You make your RRSP contributions directly to the RRSP issuer."
In terms of withdrawals, the agency states that "any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. However, you generally have to pay tax when you cash in, make withdrawals, or receive payments from the plan. If you own locked-in RRSPs, generally you will not be allowed to withdraw funds from them. If you do not know if your RRSPs are locked in, contact your RRSP issuer. If your RRSPs are not locked in, you can withdraw funds at any time."