What is an RRSP?
RRSPs are plans registered with Canada Revenue Agency into which you contribute savings or investments for retirement. One individual may have several RRSP savings accounts or plans and invests in a variety of financial instruments such as mutual funds, GICs, stocks and bonds.
There are two primary reasons Canadians invest in an RRSP - the income tax saved when you make an RRSP contribution and because the income earned within an RRSP is tax sheltered until it is withdrawn.
What can I hold in my RRSP?
You can hold a variety of investments in your RRSP, but they must be qualified investments as that term is defined in the Income Tax Act. These include:
- Cash - Canadian Dollars only
- Term Deposits and Guaranteed Investment Certificates receiving interest annually, such as those issued through Bank of Montreal
- Stocks and Bonds of corporations listed on a Canadian stock exchange
- Bonds and Debentures issued or guaranteed by the Government of Canada
- Bonds and Debentures issued by a province, municipality or Crown corporation
- Strip Coupon Bonds
- Equity-linked notes
- Rights and Warrants that can be used to purchase qualified investments
- Shares listed on a prescribed stock exchange outside Canada
- Units of a Mutual Fund trust, such as those offered by BMO Mutual Funds
- Covered calls, long calls, LEAPs calls
- Mortgage-backed securities
- A Mortgage or interest in a Mortgage secured by real property located in Canada, including your own property. Restrictions apply where it is property you or a family member owns.
The following investments are not qualified for your RRSP:
- Employee options to purchase stock
- Gold, Silver and other precious metals
- Commodity Futures or Contracts
- Listed personal property such as works of art and antiques
- Gems and other precious stones
- Land
- Bonds where the issuer is a wholly-owned subsidiary and the shares of its parent are not listed on a Canadian stock exchange
- Mortgages on commercial properties which you or a family member own
- Small business investments
- Puts and uncovered Call Options
- Bonds or Debentures of a company whose shares are listed only on a prescribed foreign stock exchange even though the company's shares may be qualified
Under the Income Tax Act, a penalty tax applies where an RRSP holds more than 30% "foreign property". So you must be aware whether the qualified investments you are holding in your RRSP are foreign property and you must be careful to limit the amount of foreign property in each RRSP to 30%. The calculation must be based on the "book value".
What is a Locked-in Retirement Account (LIRA) or Locked-in RRSP?
Legislation governing employer-sponsored pension plans generally provides for "portability" of pension rights. As a result, when an employee who is a member of a registered pension plan and, who in many cases is entitled to a deferred pension benefit, terminates employment with the pension plan sponsor/employer, he or she can request the transfer of the commuted value of the deferred pension benefit to a locked-in RRSP, also known as a LIRA. The term differs depending on the province in which the pension plan is administered, but the plans differ only in details.
A LIRA or locked-in RRSP is similar to an ordinary RRSP, except that it is governed by a "locking-in" agreement which ensures that the transferred pension funds and the subsequent earnings are used to provide periodic retirement income. In other words, it cannot be cashed-in or withdrawn in a lump sum before the specified retirement age. Some investors will have multiple LIRAs or locked-in RRSPs because they have worked at different corporations.
When must an RRSP mature?
An RRSP must mature by Dec. 31 in the calendar year in which you turn 69. That means you must cash in your RRSP or convert it to an RRIF/annuity before the end of December of that year.
What if I'm still earning income after age 71?
If you continue to have "earned income" after the year in which you turn 71, the RRSP contribution rules will still create contribution room as they do in your earlier years. This "post-age 71" contribution room may still be used to:
- contribute to your spouse's RRSP in each year up to and including the year he or she turns 71
- deduct, in the calculation of taxable income, previously undeducted RRSP contributions
