How to contribute, besides early and often

What it is

A registered retirement savings plan (RRSP), registered with Canada Revenue Agency, is intended to help Canadians save for retirement.

The money you invest in your RRSP is tax-deductible and the accumulated income grows tax-free until you withdraw the funds.

When you cash in your RRSP, or make a withdrawal from it, you usually have to pay tax. But when this is done in retirement, you will likely be in a lower tax bracket than when you were earning income.

How to do it

You can open an RRSP when you are 18, or as soon as you start earning income. As many experts point out, the earlier you start saving, the more you will accrue, thanks to the effects of compounded interest.

You will need a Social Insurance Number so your plan can be registered with the government.

You can set up your RRSP at any financial institution, such as your bank, credit union, trust or insurance company; there, you can also get advice about what sorts of investments are eligible. These include cash, guaranteed income certificates, mutual funds, and publicly traded stocks and bonds.

After you make a contribution, you will get a receipt to file with your income tax form; your contribution will count as a tax deduction.

You can make RRSP investments with more than one financial institution but because each one will be registered to your SIN, they will all be part of your RRSP portfolio. (When people talk about "buying an RRSP" they mean "making a contribution to my RRSP.")

Deadline alert

You have until Friday, Feb. 29, to make your contribution for the 2007 tax year.

Contribution limits

Generally, the amount you can invest in your RRSP for a given tax year is determined by your "deduction limit," also known as contribution room, which is calculated by Canada Revenue Agency.

Your personal limit is shown on the CRA "Notice of Assessment" that would have been sent to you after your 2006 tax return was processed.

You can also contact a CRA tax office, or inquire online at http://www.cra-arc.gc.ca to find out what your limit is. (If you belong to an employer-sponsored pension plan, your limit will take that into account.)

For the 2007 tax year, the most you can put into your RRSP is $19,000. If you are carrying forward unused contribution room from previous years, however, you may be allowed to contribute more.

If you exceed your limit, that is considered an over-contribution - which may be subject to a tax of 1 per cent per month. The lifetime allowance for over-contributions is $2,000.

Foreign assets

As of Jan. 1, 2005, you are allowed to hold foreign properties in your RRSP with no limits.

Self-directed RRSPs

With a self-directed RRSP, you can manage your own portfolio by investing in a variety of instruments - cash, bonds, shares, mutual funds, or even your mortgage. If you're considering this type of plan, it's wise to get advice from your financial institution or a professional financial adviser.

Spousal RRSPs

A spousal or common-law partner plan can ease the tax burden in a couple's retirement years if one spouse expects to have a significantly higher income than the other. The higher-income spouse makes the RRSP contributions and gets the tax deductions at the time - but the plan is registered in the name of the lower-income spouse, who can withdraw funds from it later.

Making withdrawals

Ideally, your RRSP is set up for the long term. But you can withdraw part, or all, of your savings at any time - so long as you realize that the money you withdraw becomes income and you will likely have to pay tax on it.

The government does have two programs that let you borrow from your RRSP without having to pay tax, so long as you meet certain requirements:

One is the Home Buyers' Plan. It's a one-time-only program that lets you withdraw up to $20,000 from your RRSP to buy your first home (but not subsequent homes or secondary properties); at least 1/15th of the amount you borrow must be repaid to your RRSP, starting two years after you make the withdrawal.

The other federal program is the Lifelong Learning Plan, which helps pay for postsecondary education or full-time training. You can withdraw up to $10,000 per calendar year from your RRSP for this purpose (to a maximum of $20,000 over four consecutive years). The student can be you or your spouse, but not your children. You then have to repay to your RRSP at least 10 per cent of the borrowed amount each year, over a maximum of 10 years.

RRSP lifespan

The last day on which you can contribute to your RRSP is Dec. 31 of the year in which you turn 71.

That is also the deadline by which you must close out your plan.

Most Canadians transfer their RRSP assets to a registered retirement income fund (RRIF) or buy an annuity with all or part of the proceeds. You could also convert your plan to cash and withdraw in one lump sum, but that would likely result in a very large tax bill.

Sources: Canada Revenue Agency, CARP websites

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Work ethic

56%

Proportion of Canadians who say they plan to work as long as possible.

38%

Portion who expect to work past age 65.

82%

Portion of Canadians who say they would keep working even if they had enough money to retire.