What Is An RRSP – Part 3 – Disadvantages of a Registered Account

Disadvantages of a Registered Account

• The account is registered with Canada revenue Agency (CRA). That’s where the term registered comes from.
• You are only allowed to deposit so much money.
• Withdrawals are restricted.
• You are taxed on the amount you withdraw. The more money you withdraw, the more taxes you pay. See withholding tax rates listed at the end of this chapter.
• You can’t keep this account forever. The account has to be terminated once you are 71, and you have to convert this account to a Registered Income Fund (RIF), from which you have to receive annual income by law. Also, you can take out all your money once you are 71, but this is not a good idea, as you have to pay hefty taxes.

RRSP Annual Limit

You can only invest so much money into your RRSP. The formula goes as follows:

A + B – C, where

A = Any unused portion of prior year’s contribution

B = 18% of prior year’s earned income (up to a maximum for that tax year as below)

C = Pension adjustment for the current year (RPP contributions, etc.)

Contribution Limit

2006 $18,000

2007 $19,000

2008 $20, 000

2009 $21, 000

2010 $22, 000

2011 indexed*

*Starting in 2011, the limits will be indexed for inflation