A RRSP (Registered Retirement Saving Plan) is a retirement savings and investing vehicle in for taxpayers Canada. Contributions made to the RRSP account will not be taxed until the funds are withdrawn. RRSPs have two main advantages. First, contributors may deduct contributions against their income and lower their tax bracket. Second, the growth of RRSP investments is tax sheltered. RRSP investments returns are exempt from any capital-gains tax, dividend tax or income tax. An RRSP allows the taxpayer to invest up to 18% of the previous year’s earnings, up to the maximum contribution limit of $27,230 (2020) plus any carry-forward contribution room.

As per CRA requirements, in the year the taxpayer turns 71 years old, the taxpayer has to choose one of the following options for the RRSPs:

  1. withdraw them
  2. transfer them to RRIF
  3. use them to purchase an annuity

A RRIF (Registered Retirement Investment Fund) is an extension of an RRSP. Like an RRSP, investments held within the RRIF account can continue to grow on a tax-deferred basis.

The major difference between an RRSP and an RRIF is that you can add contributions to an RRSP account up to age 71, but you cannot add to an RRIF once it is established. Meanwhile, once you convert your RRSP to an RRIF, you are required to make withdrawals at least annually, and these are include in taxable income for the year. The withdrawal rates are determined by your age and the value of the plan, and they increase over time.

Any funds withdrawn in excel of the minimum are subject to withholding tax. No withholding tax is required when you withdraw your minimum amount.

Taxpayers should consider the amount of the retirement income (RRSP or RRIF withdrawals) could impact some of the benefits they are eligible to received. Old Age Security, for example, can be impacted by the amount of income earned over the year.

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