Registered Retirement Savings Plan 101

Introduced in 1957, the Registered Retirement Savings Plan (RRSP) was part of a Canadian initiative to encourage people to save more for retirement. With a wide variety of tax advantages that can help when formulating a tax planning strategy, the RRSP has become an important part of the way that Canadians save money for the future, allowing them to provide for their retirement more effectively than by other methods of savings.

There are three kinds of RRSPs – group, spousal, and individual. Each one has benefits and drawbacks, but overall the RRSP model is a great option people can consider for wealth management planning. The trick is determining the right kind of RRSP for you and your family, and of course making regular contributions!

Here are the details of the three kinds of RRSPs.

• Group RRSP

One of the most desirable retirement planning options available, a Group RRSP is offered by some employers to allow their workers to save more effectively for retirement. Though contributions themselves are made by the employee, companies sometimes add to or match those contributions, which are generally automatically deducted from pay.

One financial institution houses all of the RRSPs for a single employer. The company absorbs the startup and maintenance costs associated with Group RRSPs, and investment options are limited. There may still be costs associated with the plan that might not be covered by the employer and will need to be paid by the individual.

The RRSP itself is actually an Individual RRSP that’s just facilitated by an employer. Though there are rules that are set by the employer as to how much and when funds can be taken out of the account, the money itself is in the name of the individual.

• Spousal RRSP

Those who are married or who are in common-law relationships are eligible for this kind of RRSP. This plan isn’t registered in the name of the individual contributing, but rather in the name of their spouse or partner.

Eligibility for a Spousal RRSP can get a bit complex, so it’s important that you understand the details before deciding to create this kind of retirement savings plan.

Qualification for a Spousal RRSP isn’t complicated, but it is important to understand. You must fill two criteria in order to qualify:

1. Have been living together for at least a year.
2. Have a child together by either birth or adoption OR have joint custody of your partner’s children.

That’s what you need to know about getting started with a Spousal RRSP, but what happens if the relationship ends? What happens to the funds is different based on whether the relationship was a marriage or common-law relationship. If the relationship was marriage, then funds are normally distributed evenly. If the relationship is a common-law relationship, then the couple should consider putting together some sort of agreement before opening the account in order to ensure that assets are divided appropriately, as they won’t always legally be divided in half.

Taxes are another interesting situation in Spousal RRSPs. If the spouse takes money out of the RRSP within three years of it having been added, then the person who contributed will pay taxes on the withdrawal. After three years, the spouse pays the taxes. Tax deductions on contributions to Spousal RRSPs are deducted from the total amount of eligible deductions for the individual that contributes, just as they are for Individual RRSPs. However they don’t affect the spouse’s ability to contribute. In other words, the tax credit limit follows the individual, not the RRSP. Couples who contribute to Spousal RRSPs often pay lower taxes than they would on individual savings accounts, which can add up to a hefty boost to their savings.

Another benefit of a Spousal RRSP is that it allows couples to split their income, which offers additional tax advantages if one member of the couple earns significantly more than the other. They can also be helpful if one of you has a pension plan and the other does not. Spousal RRSPs are

• Individual RRSP

Individual RRSPs are registered in the name of the owner. Money is contributed to this plan by the person who will be the beneficiary of it. They can be managed by you personally, allowing you ultimate control over the investments and contributions, or they can be managed by a professional advisor. The benefit of this kind of RRSP is that it offers the most autonomy and control, however along with that it leaves all of the burden on the individual in the case of management and responsibility.

For self-employed individuals or those who are unmarried, an individual RRSP is a great option for saving for retirement. It’s also a good solution for couple’s who make roughly the same amount of money.

Talk to your financial advisor about the options that you have with an RRSP and whether your retirement plans should include this kind of savings plan. There’s a reason that this savings option has been popular for more than fifty years!

For help and advice on how to save for retirement, call the financial experts at Morgan National 1-866-595-3533. For more information on retirement plans, visit “Retirement Planning” page on this website.
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