The Registered Retirement Savings Plan is one of the most effective retirement and tax planning tools made available by the Canadian government. Your contributions into a RRSP count as a deduction against your taxable income, and the interest earned on investment inside the RRSP is not taxable. You pay tax only when you start making withdrawals, preferably during retirement when your income is lower and your tax rates have come down as a result. The government allows RRSP contributions up to certain limits, so it is important to know your maximum contribution limit in order to avoid paying penalties for over-contributing.
Determine your earned income for the preceding year. Use the chart in the Canada Revenue Agency guide, "RRSPs and Other Registered Plans for Retirement" on page 12 (see Resources).
Multiply your earned income amount by 18 percent.
Find out the maximum contribution dollar limit for your contribution year. The Canada Revenue Agency website publishes that amount for each new year (see Resources). In 2010, that amount stands at $22,000.
Take the lower of 18 percent of your earned income and the RRSP maximum contribution limit.
Add the RRSP contribution room shown on line (A) of your previous year's Notice of Tax Assessment. RRSP rules allow you to carry forward any unused contribution room for all previous years going back to 1991.
Subtract any RRSP contributions you made last year.
If you have a spouse or common-law partner who stands to earn less money than you and will have limited sources of income at retirement, consider making your RRSP contribution into a spousal RRSP. The RRSP will be in your spouse's name, and your spouse will control the investment decisions, but you will claim the RRSP contribution as a deduction on your taxable income. The advantage of the spousal RRSP is that when it comes time to access the funds at retirement, the withdrawals will be taxed in your spouse's hands and the chances are that she will be in a lower tax bracket due to her lower retirement income sources.
Make sure you do not over-contribute to your RRSP. In most situations, you will have to pay a 1 percent penalty tax on your over-contributions for each month that they remain in your RRSP.
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