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An Explanation of the Registered Retirement Savings Plan (RRSP) and RRSP Limits

A lucrative way to build one’s investments for retirement in Canada is the Registered Retirement Savings Plans (RRSPs). The government delays the tax for this plan as a means to help pensioners while easing the burden on tax payers. RRSPs are as common as they are beneficial yet the RRSP limit has a roadblock for high-income workers. Simply put, RRSPs are currently not immune from taxation if the contributions rise above $22,450.

 RRSP’s were first established by the Canadian government in 1957 as a pension plan for retirees. Its purpose was to encourage people to generate more savings and remain independent at a later time when they are earning a smaller income. Individuals are permitted to add to this fund until the age of 69. Also, a spouse may contribute to the other spouse’s RRSP fund until that spouse is 69.  There is no minimum age for adding to an RRSP. While the RRSP limit is officially $22,450 (as of 2011), tax payers are not allowed to allocate more than 18% of their income to this account.

In recent years, contribution limits have decreased annually. For example, in 2007, the RRSP limit was $19,000. A year later, the limit was $20,000. Then it was $21,000 after that. By 2010, the limit was $22,000 but in 2011, that number only rose by $450. The C.D. Howe Institute, a respected public policy think tank, urged the Canadian government to take the drastic step of raising the percentage of earned income that Canadians are allowed to contribute from 18% to 34%  http://www.canadiancapitalist.com/low-savings-not-rrsp-contribution-limits-are-the-problem/. Furthermore, the institute advised the government to raise the annual contribution limit to a whopping $42,000! The theory behind this sentiment is that “in order for those with RRSPs to enjoy the same tax benefits as those with employer pensions, the Investment Funds Institute of Canada says RRSP limits should rise” \http://network.nationalpost.com/NP/blogs/wealthyboomer/archive/2010/04/01/boost-rrsp-limits-from-18-to-34-of-earned-income-ific-suggests.aspx. Supporters of this theory argue that it will increase the number of Canadians who use retirement funds as well as make retirement plans easier and more appealing to employers.

            As of yet, the recommended reforms by the C.D. Howe Institute have not been emplaced. That leaves individuals who have reached the RRSP limit ceiling only so many options. Consult with a Financial Advisor for more information. Eligibility for additional tax breaks is available contingent on whether an individual qualifies for an Individual, Spousal or Group RRSP. Learning about one’s options might result in added profits for one’s Wealth Management program.

            RRSPs are designed to save money for Canadian workers in the long run. Delayed tax breaks ensure financial independence for pensioners and in doing so, benefit tax payers.