RSP Corner

Contributions to an RSP can be deducted from your taxable income. This means you pay less tax on the money you make, leaving you with more to invest. RSPs can help you right away at tax time. When you contribute to an RSP, you can claim an equivalent deduction from your income before calculating the tax you owe. This immediate deduction is very worthwhile, especially if you use the tax saved to make an RSP contribution for next year or pay off after-tax debt such as your mortgage.

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Money you put into an RSP is tax sheltered during the years in which you are working and your annual income is relatively high. The money you contribute to your RSP (as well as the earnings you make on your investments) is only subject to tax when you withdraw it from your RSP.

People usually think of the contribution as an immediate tax deduction. It is. But what you should also know is that the long-term benefits of retirement assets in a tax-sheltered plan might be just as great as the short-term tax deduction.

Your RSP investments accumulate within the plan tax-free. Aside from your own contributions, this would include capital gains, interest, dividends, and any distributions paid out on the fund. The longer your money stays sheltered from the taxman, the greater the earning power of your investment. The most powerful benefit of an RSP is this tax-free accumulation.

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Let's compare taxed and tax free investment returns to see this advantage. First let's look at investing outside of your RSP. If you have a marginal tax rate of 40% and invest $1,000 per year for the next 30 years at an average 7% annual return, you will accumulate $60,432. Now consider if you invested the same money in an RSP. If you contribute $1,000 per year to your RSP for the next 30 years, and you earn an average 7% return, you will earn $101,073. Your investment has significantly increased when your returns were tax-sheltered in an RSP. The real power of your RSP is this compounding effect over a long period of time. With a high rate of return, RSP contributions early in your life can go a long way toward providing for your retirement.

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Consider making Spousal RSP contributions to ensure future retirement income is split evenly between spouses. The more taxable income you have, the higher your tax bracket. You should, therefore, consider allocating future taxable income as evenly as possible between you and your spouse. The objective of this strategy is to provide both spouses with similar retirement incomes. This is what is referred to as an "income splitting" opportunity.

Before setting up a spousal RSP, a couple should estimate their expected retirement incomes. If a spouse is expected to retire earlier, or has a lower expected retirement income than the contributor, a Spousal RSP should be considered.

As the contributor to a spousal RSP, you benefit from the tax deduction while building a retirement nest egg for your spouse. Amounts withdrawn from a spousal RSP will be considered part of your spouse's taxable income, provided you have not contributed any amount to a spousal plan in the current year or the two preceding years.

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There are three easy ways to find out the amount of RSP contributions you are allowed to deduct for your income taxes.

1. Check Last Year's Income Tax Notice of Assessment. Your RSP deduction limit can be found in the RSP Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment.
2. Call the Tax Information Phone Service (TIPS) at 1-800-267-6999. The service is available from the middle of September to April 30. You will be asked for your Social Insurance Number, your month and year of birth, and the total income you reported on line 150 of your income tax return for the previous year.
3. You can also use the Canada Revenue Agency "My Account” service online at www.cra-arc.gc.ca to find out the limit of your RSP contributions allowed for your income taxes. Please note that before you can access the "My Account" tax service for the first time, you must register for a Government of Canada epass.

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You may not have invested up to your contribution limits since 1991. If you haven't, you can carry them over for an indefinite period of time (assuming you are not turning 71 soon). Any carry-forward contribution room is shown on your Notice of Assessment.

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Everyone is allowed a lifetime over-contribution limit of $2,000. If you've never taken advantage of this – do it now. But beware, CRA charges a 1% monthly penalty to any amount over the $2,000 limit.

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You can contribute to an RSP until the end of the year in which you turn 71, provided you have earned contribution room.

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In order for your RSP contributions to be eligible for the previous years' tax filing, you must make your contributions within the first 60 days of the current year. This year's RSP contribution deadline is March 1^st, 2011.

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Dollar cost averaging is a simple strategy that helps you save by averaging out the cost of your mutual fund units, by investing the same amount of money on a regular basis (weekly, bi-weekly or monthly). Since mutual fund prices fluctuate, you will buy more units when markets are low; and you will buy fewer when markets are high.

Here's an example for if you started investing regularly:

But if you only did a lump sum investment:

*This table is used only to illustrate the possible effects of regular investments in a mutual fund and is not intended to reflect future values of The Streetwise Funds or returns on investment in The Streetwise Funds.

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