What Is an RSP Charge? Fees, Taxes & Penalties

A Registered Savings Plan (RSP) is a financial tool designed to help individuals save for retirement. These plans offer tax advantages, allowing savings to grow without immediate taxation. Understanding the financial implications, including fees, taxes, and potential penalties, is important for effective long-term planning. This article explores the different charges that can arise with an RSP, clarifying how they might impact your savings.

Understanding RSP Fees and Costs

Holding and managing an RSP account involves costs and fees that can diminish investment returns. One prevalent charge is the Management Expense Ratio (MER), which applies to mutual funds and exchange-traded funds (ETFs) held within an RSP. The MER is an annual percentage of assets managed, ranging from 0.5% to 2.5%, and is deducted directly from the fund’s assets.

For self-directed RSPs, trading commissions are a common cost. These fees are incurred each time investments like stocks or ETFs are bought or sold within the account, with charges typically ranging from $5 to $10 per trade. Frequent trading can significantly accumulate these costs, eroding investment gains.

Account administration fees are often charged annually by financial institutions for maintaining the RSP. These fees can vary widely, from $25 to $150 per year, though some institutions may waive them for larger account balances or specific product holdings. Additional administrative charges might include transfer fees, ranging from $50 to $150, when moving an RSP between different providers, or deregistration fees of approximately $50 to $100 when closing an account. For those utilizing financial advisors, separate advisor fees, such as a percentage of assets under management (e.g., 0.5% to 1.5%), may also apply, further influencing the net return on RSP investments.

Understanding RSP Withdrawal Taxes

Withdrawals from an RSP are generally treated as fully taxable income in the year received, with few exceptions. The amount withdrawn is added to your other income and taxed at your marginal tax rate.

Withholding tax rates depend on the withdrawal amount and residency. For withdrawals up to $5,000, a 10% withholding tax applies. Amounts exceeding $5,000 up to $15,000 incur a 20% withholding tax, while withdrawals over $15,000 are subject to a 30% withholding tax. This withheld amount is an estimate, serving as a prepayment towards your annual tax liability.

Actual tax owed is determined when you file your income tax return. The amount withheld is credited against your total tax obligation; you may receive a refund or owe additional tax based on your overall income and deductions. Significant RSP withdrawals can increase total taxable income, resulting in a larger overall tax bill.

There are specific scenarios where withdrawals may not be immediately taxable if certain conditions are met. The Home Buyer’s Plan (HBP) allows eligible individuals to withdraw up to $60,000 from their RSP to purchase or build a qualifying home, provided the funds are repaid within a 15-year period. Similarly, the Lifelong Learning Plan (LLP) permits withdrawals of up to $10,000 per year, to a maximum of $20,000, for education or training for yourself or your spouse, requiring repayment over a 10-year period. If these withdrawn amounts are not repaid according to the established rules, they become taxable income in the year repayment was due.

Understanding RSP Over-contribution Penalties

Contributing more to an RSP than the allowed amount, known as an over-contribution, can result in penalties. An individual’s RSP contribution room accumulates annually, generally based on 18% of their earned income from the previous year, up to a specific annual maximum. This contribution room is reduced by any pension adjustments from employer-sponsored plans and is tracked by the tax authority.

An over-contribution occurs when contributions exceed this calculated limit. There is a small lifetime buffer, typically $2,000, that allows for minor over-contributions without triggering a penalty. However, any amount contributed beyond this $2,000 buffer is subject to a penalty.

The penalty is calculated at a rate of 1% per month on the amount that exceeds the allowed contribution room plus the $2,000 buffer. This monthly penalty continues to be applied for each month the excess amount remains within the RSP. For instance, an over-contribution of $5,000 beyond the allowed limit would incur a 1% penalty on $3,000 ($5,000 – $2,000 buffer), resulting in a $30 monthly penalty.

Rectifying an over-contribution typically involves withdrawing the excess amount from the RSP. Additionally, individuals must file a specific tax form, such as the T1-OVP, to report the over-contribution and calculate the penalty owed. This form and any associated penalty payment are generally due within 90 days after the end of the calendar year to avoid further late-filing penalties or interest charges.