Deferring taxes on RRSPs (Registered Retirement Savings Plans) and PRPPs (Pooled Registered Pension Plans) in Quebec is an important financial strategy to plan and maximize your retirement savings. Additionally, by contributing to one or more of these plans, you can reduce your tax bill each year when filing your taxes.
To better understand the tax refund on RRSPs and PRPPs, EB Conseil Fiscal offers you a comprehensive guide on this topic.
What is tax deferral?
Tax deferral on RRSPs and PRPPs means that the income earned in these plans is not taxed immediately. You can contribute to your RRSP or PRPP with pre-tax income, and these contributions are deductible from your taxable income for the current year.
Taxes on PRPPs or RRSPs and on the investment gains they generate are deferred until you withdraw funds from the plan, typically in retirement.
RRSPs, PRPPs, and taxes
Tax refund and RRSPs
The tax refund process is simple. When you contribute to an RRSP, your taxes decrease! The amount contributed is deductible from your taxable income. Each year, the tax refund calculation is based on your income. You can contribute up to 18% of your earned income from the previous year, up to a government-set maximum. Unused contribution room can be carried forward to future years.
Additionally, investment income (interest, dividends, capital gains) in an RRSP grows tax-deferred until you withdraw the funds. When you withdraw money from your RRSP, the withdrawn amount is added to your taxable income for the year of the withdrawal, and you pay tax accordingly.
PRPPs
The PRPP is a collective pension plan introduced for self-employed workers and employees of businesses that do not have a pension plan. Contributions can be made by the employer, the employee, or both.
As with RRSPs, PRPP contributions are tax-deductible, and the funds accumulated in the plan grow tax-deferred until withdrawal.
What are the advantages of tax deferral?
- Immediate tax savings: by contributing to an RRSP or PRPP, you benefit from immediate tax savings. You reduce your taxable income for the current year, which directly reduces the taxes you owe.
- Accelerated growth: money in these plans grows tax-deferred, which can accelerate the growth of your retirement savings through compounding.
- Deferred taxation: tax is paid only when you withdraw funds, allowing you to defer taxes until a time when you may be in a lower tax bracket, such as in retirement.
Taxes on RRSPs and PRPPs at withdrawal
When you withdraw funds from an RRSP, whether as a lump sum, regular payment, or when converting it into a RRIF (Registered Retirement Income Fund), the withdrawn amount is added to your taxable income for that year. Withholding tax also applies.
Withdrawals from PRPPs are taxed in the same way as RRSPs. When you start receiving benefits from the PRPP, these amounts are included in your taxable income.
How much should you withdraw from an RRSP to save on taxes in retirement?
Once you retire, you must convert your RRSP into a RRIF, or purchase an annuity, by the end of the year you turn 71. Once converted into a RRIF, you must start making minimum annual withdrawals. These withdrawals are taxable, but you can manage your withdrawals to minimize your taxes.
Additionally, if you have a spouse, you can split pension income. This allows you to allocate up to 50% of eligible pension income to the lower-income spouse to reduce the overall taxes paid.
Withdrawals and impact on government benefits
When you reach retirement age, you may be eligible for the Guaranteed Income Supplement (GIS) and Old Age Security (OAS) pension.
Withdrawals from an RRSP or PRPP can affect your eligibility for benefits like the GIS, as these withdrawals increase your taxable income. Furthermore, if your annual income exceeds a certain threshold, you may be required to repay part of your OAS.
Get advice to minimize taxes on RRSPs and PRPPs
As you can see, deferring taxes on RRSPs and PRPPs in Quebec is a powerful strategy to save for retirement while benefiting from immediate tax savings. The key lies in careful planning of contributions and withdrawals to maximize tax benefits and minimize taxes paid in retirement.
To get the most out of these plans, we recommend:
- Strategic withdrawals: plan strategic withdrawals to minimize the total taxes paid on your retirement savings. For example, withdrawing funds during low-income years can reduce your overall taxes.
- Maximizing tax benefits by contributing regularly, fully utilizing your contribution room, and carrying forward unused contributions to future higher-income years.
Would you like to discuss the best savings and withdrawal strategies? Contact our tax accountants to discuss your situation!
