A Registered Retirement Savings Plan (RRSP) is designed to help Canadians(those without a company pension plan) save for retirement on a tax-favored basis. Contributions to an RRSP are deductible and the contributions and earnings are not taxed until distributed. The 2018 RRSP contribution deadline is March 1, 2019. The maximum amount that can be contributed to your 2018 RRSP is the lesser of 18% of your earned income from the previous year (wages/salary and self-employment income) or $26,230. Unused contributions are carried forward and allow you to make catch-up contributions in future years.
You can withdraw an amount from your RRSP up to $25,000 as a first-time homebuyer or up to $10,000 per year (maximum $20,000) to pay higher education expenses. The withdrawn amounts must be returned to your RRSP over a 15 year period (first-time homebuyer) and 10-year period (higher education expenses).
You can find your 2018 RRSP contribution limit through CRA My Account, on your most recent Notice of (Re)Assessmentt or by contacting CRA at 1-800-959-8281. It is important not to exceed your RRSP contribution limit. If you exceed the maximum contribution limit, the excess amount will be subject to a 1% per month penalty until you correct the excess contribution by withdrawing the excess amount.
Your RRSP plan must be converted to a Registered Retirement Income Fund (“RRIF”) by the end of the year you turn 71. You must begin to make the required minimum distribution in the year following the year you turn age 71. On death, undistributed amounts from a RRSP/RRIF are transferred to a spouse or included in income in the year of death.
In general, RRSPs are more attractive for physicians in higher tax brackets ($150,000 +), since you receive a greater benefit from deducting RRSPs against higher income. For lower-bracket physicians, on the other hand, the tax benefit from making an RRSP should be considered in the context of your future expected income over the next several years, your expected effective tax bracket in retirement, and the impact of any old age security claw back and reduction of other benefits as a result of income received in retirement.
Please get in contact with us at [email protected] for further details. Elliott Stone, CPA, CA, is the founder of MD Tax Physician Services in Toronto.