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What is a Halal RRSP and how does it work?

By definition, an RRSP stands for “Registered Retirement Savings Plan” and was created by the government to provide tax breaks to those who invest money in RRSPs as a way to motivate them to put away money for their retirement. 

The RRSP is just an account with some tax rules around it. It is how the money that is deposited into this account gets invested that will make it halal or not. The focus here should not be the account type but the underlying investments. For example, if you open an RRSP and deposited funds into this account that were held in cash that does not earn any interest, this account would be considered permissible by Islamic scholars. If however, that cash was invested into non-shariah compliant stocks, bonds, ETFs, mutual funds and the like, then this would be considered impermissible. The focus here is the underlying investments. As long as that cash is being used to buy Shariah-compliant investments such as the Manzil Mortgage Fund then you should be able to sleep peacefully at night. 

As a tax-advantaged account RRSPs act as a tax-deferral strategy, meaning any money you contribute will be exempt from having to pay any taxes to the CRA the year you make the deposit, and will only be taxed years down the line when you withdraw it. Not only are your contributions exempt from taxes the year you make your deposit, but they also provide tax relief on your that same year’s current tax bill.

How much tax can I save with my RRSP?

Here’s how a tax-deferred account like an RRSP works. Let’s say you make $70,000 a year and you decide to put the maximum allowable into your RRSP—$12,600 (18% of $70,000). When tax day comes around, the CRA will treat you as though you earned just $57,400 and you would save approximately $3,465 to $4,677 depending on the province you reside in. If you would like to find out how much you could save by opening an RRSP and your intended deposit check out this RRSP calculator.

Now, just because your RRSP is tax-deferred doesn’t mean that it’s tax-free. You will eventually have to pay taxes when you withdraw your money years down the line, which should be when you’re retired and your income less than what it is today putting you in a lower tax bracket and saving you money on the way out.

Do RRSPs have Contribution Limits?

Because RRSPs are registered accounts, they come with rules. One of the most important rules concerns the amount of money you can contribute to the account in any given year; it’s either 18% of your past year’s income or a maximum amount, whichever is smaller. The maximum amount changes yearly, but you can find this year’s contribution limit in the table below. RRSPs also carry forward, meaning, if you didn’t max out your investments in earlier years you can always catch up and get an even bigger tax break. If you don’t know if you have some carry-forward room, your best bet is to check out the Notice of Assessment that you got after filing your taxes. 

 

Year RRSP Deduction Limit
2019 $26,500
2018 $26,310
2017 $26,010
2016 $25,370
2015 $24,930

 

Halal RRSP vs Halal Group RRSP

The only difference between a Personal RRSP and a Group RRSP is that they are administered by your company. Because your employer will often match a portion or even every dollar of your GRRSP contribution, this can put you into a huge financial advantage. Think of it like this, if you add $100 to your RRSP and your employer says they will give you $50 on your behalf – you have essentially made a 50% return, not including the additional immediate tax benefits that are realized. This is a rate of return you cannot get in any risk-free investment. The disadvantage to GRRSP’s today is that there are no halal investment options through the investment partners your company has hired. Until today – you heard right. The Manzil portfolios are available as a GRRSP through our Robo-Advisor, WealthBar

Over contribution to RRSPs

Mistakes happen and Oops!, sometimes you put more money into your RRSP than you were allowed to. Don’t sweat, the CRA will forgive you, but only up to any amount to $2,000 over your annual limit. This is a lifetime limit, not annual and this over-contribution won’t be considered tax-deductible. If you go over the $2,000, the CRA will mail you a notice that you’ve over contributed and encourage you to take it back out of your RRSP otherwise they’ll begin to charge a penalty of one percent (1%) on that over-contribution, for every month you‘re over the limit.

RRSP Home Buyers Plan

RRSPs have a couple of “unlockable” features that you can access before you retire without having to pay tax upon its withdrawal. Allow us to introduce to you The Home Buyers Plan (HBP). The HBP, a Canada Revenue Agency (CRA) program, allows eligible first-time homebuyers to withdraw up to $35,000 (up from $25,000) tax-free from their RRSP to be used towards a down payment on the purchase of a home. This way, you can take advantage of the tax deductions that an RRSP contribution provides while building that down payment for your home. You can then withdraw these funds on a tax-free basis but you will have 15 years to pay it all back, essentially acting like a tax-free and interest-free loan – completely Halal! To learn more about your eligibility and the rules around the Home Buyers Plan withdrawal and repayment the government of Canada spells it all out here.

I hope that helps break it down for you inshallah. You can learn more about RRSPs and earn some really exciting rewards by visiting our RRSP page here.