It’s RSP Season. What Does That Mean?
By PAIP Canada staff
RSP stands for Retirement Savings Plan, and RSP plans are very valuable to many Canadians. At the present time, this is the only registered plan that provides taxpayers with a deduction on the amount(s) contributed into the plan. As an example, if a taxpayer earned $100,000 during the calendar year and contributed $10,000 into their RSP, then he/she would only be taxed on $90,000 of income.
For those who are employees and receive a paycheque, this often translates to a tax refund as their employer is required to withhold an appropriate percentage of one’s income “at source” meaning from their paycheque, and remit that amount to the government.
Prior to 2009, RSP plans were the only registered savings vehicle available for Canadians, which resulted in its popularity. Since the introduction of the TFSA however, Canadians have been given more than one choice which led to a decrease in the use of RSP plans. Where many Canadians seem to hesitate is in the decision of where to invest their money.
Although both plans offer benefits, the bottom line is that RSP plans have become much more valuable to Canadians who are high income earners, and those who expect to face a lower marginal rate of tax (MRT) during retirement.
Since there’s a tax deduction from contributions (meaning a tax savings at one’s MRT), then the withdrawals have to be taxed as income when they’re made. The good news is retirees are typically in a lower MRT, and therefore should benefit from the difference between the previous (higher) MRT, while they were working, and their current (lower) MRT, during retirement.
For professionals in the financial industry, the RSP plan is one of the core retirement savings vehicles that allows many clients to reach their goals. It’s considered part of almost every financial plan. For the 2022 tax year, the deadline to make one’s contribution is March 1st, 2023, and the maximum dollar limit is $29,210. Of course, to be able to contribute that much, one must have earned $162,278 as contribution room is calculated as 18% of the previous year’s earned income (subject to a number of adjustments).
Those who are part of a company pension plan or other employer sponsored registered plan should familiarize themselves with the tax treatment of these benefits before making a contribution.
For those who are unsure of their RSP contribution room, their annual notice of assessment provided by the Canada Revenue Agency is the place to find it. The notice provides the amount of carry forward contribution room for each individual taxpayer since they’ve been working.