RRSP Season Ends Soon...

It's that time of year in Canada. RRSP deadlines for 2006 are looming, March 1, 2007 is the last date you can purchase an RRSP and use it as a deduction for your 2006 taxes. An RSP or RRSP is a registered retirement savings plan. What this means is that the investment can accumulate earnings tax free within a registered plan. Income taxes are paid when the registered funds are withdrawn. Income tax is deducted at the source by the financial institution dependent upon how much you are withdrawing.

Non-registered investments have already paid tax on their income when it was earned.

Consider a spousal RRSP if you are in the higher tax brackets. The idea of a spousal RRSP is to save money for retirement in a registered plan in your spouse's name. The contributor usually the higher income earning partner receives the tax deduction. The idea behind spousal RRSP's is that when the money's are needed for retirement the money is withdrawn by the spouse with the lower income and therefore income tax is paid on the money at the lower income spouse's tax rate.

Don't forget about the tax implications of withdrawing RSP or RRSP'S. RRSP income is taxable income and the full amount withdrawn will be added to your income in the following year of your withdrawal. Many people have forgotten they withdrew RRSP's by the time they have to claim them. They may not have realized what the tax implications would be. Therefore they may not have put away additional monies to cover the taxes that could be owed. When RRSP income is added to your gross income for the year the extra income can push you into a higher tax bracket. Therefore you could end up owing additional taxes beyond those which were deducted by the financial institution when you cashed them in. Many people are not prepared for this when it comes time to claim this RRSP income on their taxes.

Just to be on the safe side I advise people to put an additional 20 to 30% of the money they've withdrawn from their RRSP's into savings until they have filed their taxes and claimed the withdrawn RRSP amounts. This way you will have the additional money if you owe additional taxes. If you don't owe additional taxes you can start an emergency fund, or reinvest in RRSP's for the following year with the additional funds you've saved.

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