A registered Retirement Savings Plan (RRSP) is the most popular vehicle available to individuals to defer taxes and save for retirement.
The growth in a RRSP accumulates on a tax-deferred basis and will be taxable only when they are withdrawn.
RRSPs must be terminated or converted to a Registered Retirement Income Fund (RRIF) once the investor reaches the age of 71.
Contributions made to an RRSP are tax deductible. For any given year, tax-deductible contributions may be made during the year or within 60 days after year-end. The investor decides if the contribution made during the first 60 days of a year is applied for that or the preceding taxation year. Unused contribution room may be carried forward to future years.
Spousal RRSPs are plans where the plan holder’s spouse is the contributor. This allows couples to split their income in retirement years in order to minimize their income taxes.
Usually, the spouse in the higher tax bracket is the contributor since it is the plan holder (in a lower tax bracket) who will eventually receive the income from the plan and will thus pay less tax.
The eligibility requirements to set up a spousal RRSP are identical to those for an individual RRSP.
Funds may be transferred from one RRSP to another without tax consequences. This can be done using a T2033 form.
Retiring Allowances and Severance
A retiring allowance (which includes a severance pay and amounts received for wrongful dismissal) may be transferred tax-deferred to an RRSP rather than taxed as income when received.
There is a limit of $2,000 for each year/part year of employment before 1996, plus $1,500 for years of employment before 1989 for which no employer pension contributions have vested. A transfer of a retiring allowance requires a TD2 form.
Transfers from Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs) to an RRSP are generally not allowed. Exceptions are made for some DPSPs, for example AreclorMittal Dofasco’s DPSP can be transferred to a RRSP.
Due to the nature of pension funds, if transfers are allowed the transfers must be done into a locked-in RSP (LRSP or a LIRA). For example, a component of the ArcelorMittal Dofasco’s Fund can be transferred to a LRSP or LIRA. If the pension funds are not locked in, then the transfer to a RSP is allowed.