What’s the difference between an RRSP and a RRIF?
A Registered Retirement Savings Plan, or RRSP, is what you save for retirement. Government approved assets include savings accounts, guaranteed investment certificates (GICs), and mutual funds.
Contributions to RRSPs are deductible from taxable income, which helps reduce income tax payable for the year in which the contributions are made.
Conversely, a Registered Retirement Income Fund, or RIFF, is the pot of money you have to spend after you’re retired. It’s a fund that retired people can draw from after they’ve turned 65. The first dollar must be drawn no later than the year in which you turn 72. You can’t add money to a RIFF account, either.
The government has regulations on the minimum amount you can withdraw each year, and that amount is dictated based on your age. Those rules just changed last year though, and the minimum withdrawal amount has been reduced because the government realized that people are living longer and are heading into retirement with less money.
What are some important things to know about RRSPs
This year, the last day you can contribute to your RRSP is February 29.
That being said, there is a maximum amount you can contribute annually, but that number changes each year. People do receive a notice of assessment, which comes back as a part of filing your taxes, and that tells them how much they can contribute based on their earnings during the previous year. For 2016, it is 18% of earned income to a maximum contribution of $25,370. Unused RRSP contribution room carries forward until you retire.
What if I over contribute?
You only have $2,000 that you can over contribute to an RRSP before penalties are applied.
What if I don’t contribute?
That’s okay. There is no minimum that you have to contribute annually. I do suggest putting something away on a monthly basis to keep up with dollar-cost averaging. You never know one month to the next whether you’re buying low or buying higher in a fund or a stock.
Can I ever take assets from my RRSP before I retire?
You can take money out, but then you have to deal with withholding taxes as well as claiming that money as income.
There’s also a first time Homebuyers’ Plan for young families who want to buy a house, and they can use a percentage of their RRSPs to put down on their home. This withdrawal will not be taxed as long as you pay it back within a certain amount of time.
When do you recommend setting up an RRSP?
Any time after age 18, or when you have a full-time job, is a good time to start saving. I recommend using this time to take on more risk. You might have three out of ten years of no growth, or loss, but ultimately it will yield an amount that you can really benefit from once you’ve retired.