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RRSPs more than just a retirement vehicle: Ontario CAs

RRSPs can buy a first house, act as a “safety net”

 

TORONTO, FEBRUARY 10, 2011 – Don’t let the word “retirement” in Registered Retirement Savings Plan (RRSP) fool you, according to Ontario Chartered Accountants the enormously popular RRSP can be the key to becoming a homeowner or, in bad times, keeping a roof over your head. Along with Tax-Free Savings Accounts, individuals have two excellent vehicles for saving money for unexpected events.

Use your RRSP to save for your first home

RRSP funds can be used to help finance a first home. “When buying your first home you can withdraw up to $25,000 from your RRSP. But you’ll need to have the $25,000 in your RRSP at least 90 days before making that withdrawal,” said Chartered Accountant Glenn Lott, Partner at Lott & Company, Chartered Accountants in Markham. If you would not have otherwise made a contribution and you have RRSP room, consider contributing the funds your have set aside for the purchase, wait at least 90 days and then make a Home Buyers  plan withdrawal. This way, the funds you’ve saved for the purchase are still available, and you may have extra funds available due to the tax reduction. 

The money taken out of the RRSP under the Home Buyers Plan will have to be repaid over 15 years, typically but not always in equal installments. If the required Home Buyers’ Plan repayment is not made, the amount of the required repayment must be included as part of your income in that year. “Consider skipping a repayment of the Home Buyers’ Plan withdrawals if you have a low income year (for example, you’re on maternity leave or collecting employment insurance).

Use your RRSP as insurance against a loss of income

In tough times, money saved in an RRSP can be withdrawn to help. “You can draw on your RRSP any time your earnings are low,” said Chartered Accountant Frederic Gregoris of Mississauga. “If you lose your job, become ill or injured and unable to work, the money is there. But remember, when you withdraw it — it becomes taxable income. The idea is to contribute to your RRSP when you’re making more money, and to take it out when you’re making less — preferably a lot less.”

Using 2010 tax rates, the first $40,970 you earned (that’s “net” or “taxable income”) was taxed at the lowest rate: about 15 per cent federally, and about five per cent for Ontario, where the upper limit of the lowest tax bracket was $37,106. Any tax savings from refundable tax credits (i.e. charitable donations, basic exemptions, etc.) would have reduced those rates even more. On an income of about $41,000, Gregoris estimates that the income tax payable could have been as low as about 16 per cent — a little over $6,800 — when everything is considered. 

Keep in mind that there is also a withholding tax to cover all or part of that upcoming tax bill. This is just an interim payment, as the final amount of tax due or refundable will be calculated on your tax return for the year of withdrawal.

Use your RRSP to fund your education

If you or your spouse lose a source of employment or business income, you may want to go back to school to increase your knowledge or develop new skills. If you do, keep in mind that you can take out $20,000 from your RRSP over a period of four years under the government’s Lifelong Learning Plan (LLP). The amount will have to be repaid to your RRSP over a period of ten years.

There are several conditions that apply, but the two most important ones are that you or your spouse must be a full-time student and you must enroll in a qualifying educational program at a designated educational institution. If you are disabled, then part-time enrollment is acceptable. For more information on the LLP, see: http://www.cra-arc.gc.ca/E/pub/tg/rc4112/rc4112-e.html#P147_9763.

RRSPs are much more than a retirement savings plan; they can be a key part of a Canadian’s financial security throughout their lifetime. If in any doubt about how to proceed when dealing with RRSP issues, get advice from a Chartered Accountant in your home community.

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For more RRSP tips:
As an example of the type of expertise a Chartered Accountant can offer, we’ve attached a link to Institute articles containing important tips to consider when setting up a Registered Retirement Savings Plan. All of the information in the article is verified, accurate and provided by the Institute of Chartered Accountants of Ontario as a public service. It is available at: http://www.icao.on.ca/MediaRoom/MediaArticles/TaxPlanArticles/1009page5883.aspx

If you use any of the tips, we only ask that you maintain the credit to the Institute. It would be very much appreciated if you could let the Institute know when you run any of our RRSP tips.


About the Institute of Chartered Accountants of Ontario:
The Institute of Chartered Accountants of Ontario is the qualifying and regulatory body of Ontario’s 34,000 Chartered Accountants and 5,000 CA students. Since 1879, the Institute has protected the public interest through the CA profession’s internationally recognized standards of qualification and the enforcement of its rules of professional conduct. Chartered Accountants are the professionals Canada’s business leaders trust to help make the financial, strategic and leadership decisions that matter. The Institute’s website is: www.icao.on.ca and the student website is www.guidetorulingtheworld.ca.


For more information, please contact:
Perry Jensen
The Institute of Chartered Accountants of Ontario
69 Bloor St. East, Toronto, Ontario   M4W 1B3 
416-969-4271 or 1-800-387-0735, ext. 271
pjensen@icao.on.ca