What is a RRSP? Complete Canadian RRSP Guide
Find out everything you need to know about the Registered Retirement Savings Plan (RRSP).
24 Minute read
Originally published: March 29, 2022
Updated: May 25, 2023
What is a RRSP? Complete Canadian RRSP Guide
Find out everything you need to know about the Registered Retirement Savings Plan (RRSP).
24 Minute read
Originally published: March 29, 2022
Updated: May 25, 2023
Having a Registered Retirement Savings Plan (RRSP) is important, and it is among the essential savings accounts that every Canadian should have, like the Tax-Free Savings Account (TFSA). An RRSP is beneficial to you in the long run, as you will have an accumulation of savings to use for your retirement, but the RRSP can also help you deduct your taxable income. A growing number of Canadians are becoming more aware of the importance of having savings accumulated for retirement.
The RRSP can be a great way to ensure you have savings that will last you in the long term. You also have the option of using your RRSP to make investments in stocks for your first home purchase. In this blog, we will discuss all of the features of the RRSP, why you should have one, the pros and cons, how you can use your RRSP before and after retirement, the types of RRSPs, and much more.
In this article
- What is a Registered Retirement Savings Plan (RRSP)?
- How a Registered Retirement Savings Plan (RRSP) works
- Pros and Cons of having a Registered Retirement Savings Plan (RRSP)
- Why you should have a Registered Retirement Savings Plan (RRSP)
- How to use your Registered Retirement Savings Plan (RRSP)
- Types of Registered Retirement Savings Plan (RRSP)
- Investing with a Registered Retirement Savings Plan (RRSP)
- Frequently asked questions (FAQs) about Registered Retirement Savings Plan (RRSP)
What is a Registered Retirement Savings Plan (RRSP)?
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings plan that is established by you and registered by the government. Ideally, you should contribute to the RRSP throughout your life, and once you retire, you convert it to a Registered Retirement Income Fund, then purchase an annuity or make a lump-sum withdrawal to access your savings. You can also withdraw funds from your RRSP to put towards the purchase of your first home or education. The RRSP is a great way to lower your taxes now while also saving money for your future retirement plans. You can contribute to this account until you are 71 years old and withdraw the money and transfer it into a Registered Retirement Income Fund (RRIF) as early as 55 years old.
How a Registered Retirement Savings Plan (RRSP) works
The way that a Registered Retirement Savings Plan (RRSP) works is simple. Once you open an RRSP account, you can decide to use it for just saving up cash, or you can save and combine it with an investment vehicle (GICs, ETFs, bonds, stocks, and mutual funds) to earn income on your savings account. Ideally, you want to make recurring contributions to your RRSP, which is beneficial to your investments because they are tax-deferred until they are withdrawn. The contributions that you make to your RRSP are tax-deductible, meaning that your contributions can be deducted from your total income when you file your income tax every year, or you can carry them over to the next year’s tax season if you expect a higher income. After years of savings, you must stop contributing to your RRSP the year that you turn 71 years old. You can then convert your RRSP into a Registered Retirement Income Fund (RRIF), purchase an annuity, or withdraw your savings as a lump-sum to receive your savings. Receiving your savings will be considered taxable income, but your tax rate will be lower since you will most likely be earning less income when retired.
You can also access money from your RRSP if you are planning to go back to school and get an education with the Lifelong Learning Plan. You can also access some money from your RRSP if you are purchasing your first home with the Home Buyers’ Plan.
Pros of having a Registered Retirement Savings Plan (RRSP)
Tax-deferred, and tax free investment growth
Reduce your income tax with contributions to your RRSP
RRSP is safeguarded from creditors
Use your RRSP savings for your first home purchase
Use your RRSP savings to pursue your education
Withdrawals can be made anytime in the case of emergency
Cons of having a Registered Retirement Savings Plan (RRSP)
Contribution room is limited based on how much income you earn
Withdrawals are taxed heavily
Home Buyer’s Plan and Lifelong Learning Plan funds must be returned or you risk getting penalized
RRSP savings may affect eligibility for federal benefits
Withdrawals before maturity can be taxable, and can risk compounded interest
Why you should have a Registered Retirement Savings Plan (RRSP)
The main reason why you should have an RRSP account is to save for your retirement. Retirement is a tough time for many Canadians if they are not financially equipped to afford not working. Many Canadians find it more difficult than they originally expected when trying to afford the living expenses as a retiree.
Below are just some of the reasons why you need to be more conscious of your retirement planning and why you should have a RRSP.
How Much Should You Have Saved Up for Retirement
Even with a pension plan, the funds are simply not enough to compensate for all expenses to live a comfortable retirement. Some studies have shown that Canadians should expect to spend approximately 70–80% of their pre-retirement income when they retire. This is a lot of money, but it is a realistic estimate, and you should prepare for your retirement as soon as possible.
Invest Your Contributions for Growth
With an RRSP, you can save throughout the years, and can use the RRSP as a vehicle to drive income on your savings through tax-deferred investments. Savings can be made weekly, bi-weekly, or monthly to compound the investment.
Take Advantage of the Contribution Limits/Deadline
The yearly contribution limit is usually 18% of your total annual income up to a certain maximum (for 2023, the maximum is $30,780). This amount has a deadline each year, which is typically at the beginning of March. For the 2023 tax year, the deadline is March 1, 2024. This deadline means that any contributions made to your RRSP until March 1st, 2024, can be filed in your 2023 income tax return. With this being said, you are encouraged to reach your contribution limits every year if that is possible. It is very important to try to reach your limits because contributions to your RRSP will be deducted from the taxable amount on your income tax return.
Pay Less and Claim Less on Your Income Tax
Contributions made to your RRSP will be deducted from your income when you file your tax return. Ultimately, you can reduce the taxable amount of income on your tax return by 18%, which is a dramatic amount. This is one of the most unique aspects of the RRSP, which makes it extremely attractive compared to non-registered retirement savings accounts. You are basically saving both for your future retirement plans, and for the taxes you might be charged currently, therefore, it is a win-win situation.
How you can use your Registered Retirement Savings Plan (RRSP)
There are a couple of ways that people can use their RRSP when they retire and before they retire. Prior to retirement, you can use your RRSP to purchase your first home with the Home Buyers’ Plan or to go to school with the Lifelong Learners Plan. When you retire, you can transfer your money into a Registered Retirement Income Fund (RRIF), an annuity, or take the money out in a lump sum.
Lifelong Learners Plan
You can use your RRSP if you are looking to get an education or for training with the Lifelong Learners Plan, which will allow you to make a withdrawal from your RRSP for educational purposes. This plan allows you to withdraw $10,000 per year up to a maximum of $20,000. This plan will require you to return the money you withdrew, back into your RRSP within 10 years of withdrawing it. It roughly equates to paying one-tenth of the total amount withdrawn each year.
You should also create a repayment schedule and plan with your bank to make sure that you aren’t missing out on payments, but more importantly, if you do not return the money that you withdrew, it will be considered income. For example, if you need to repay $3,500 but only repaid $2,000 that year, the government will consider the remaining $1,500 as income, and you will need to pay income tax on that amount.
Home Buyers’ Plan
The Home Buyers’ Plan (HBP) is another awesome way to use your RRSP before retirement. This plan allows you to borrow up to $35,000 tax-free to use as a down payment on a house. This is a great way to bump up your down payment dramatically, and it is even better if your partner has an RRSP. Your partner (if they are also a first time home buyer) can also borrow up to $35,000 tax-free from their RRSP for the down payment; this is a combined total of $70,000 tax-free! You must make repayments and return the money that you borrowed within 15 years of withdrawing it.
How to enroll in to the Home Buyers’ Plan
The Home Buyers’ Plan works as long as the amount you plan on withdrawing is in your account 90 days prior to withdrawing it. You then need to fill out the T1036 Form from the Canada Revenue Agency and coordinate the withdrawal with your bank. These forms will be referenced when you file your taxes in the year you withdraw the amount. You must also make sure that you withdraw the amount within 30 days of taking on the title of a home, if you exceed this timeframe, you will not be eligible for the HBP.
Home Buyers’ Plan eligibility requirements:
- RRSP funds that you are borrowing must be in the account 90 days prior to withdrawal
- You cannot have owned a home in the last 4 years
- You have entered into an agreement to buy or build a qualifying home
- You intend to primarily reside in the home you are purchasing within 1 year of purchase
- Must make the withdrawal within 30 days of taking on the title of the home purchase
- Must be a Canadian resident
- If you have taken part in the HBP previously, you must not have an outstanding balance on the repayment
Home Buyers’ Plan repayment
- You must repay the borrowed amount within 15 years of withdrawing it
- The first repayment amount must be paid in the first 2 years after withdrawal
- If a repayment is not made or missed, then the repayment amount that was miss will be considered taxable income that year
- To find out how much you owe in instalments:
- For example let’s say you borrowed $35,000 and want to pay it back in 15 years. The total RRSP withdrawal amount is $35,000, so divide $35,000 ÷ 15 year = $2,333 annual payment.
- Now take the annual payment and divide it by 12 months: $2,333 ÷ 12 months = $194.41/month
Registered Retirement Income Fund (RRIF)
A Registered Retirement Income Fund (RRIF) is a retirement fund that pays out income to you when you become a retiree and start using your Registered Retirement Savings Plan money, and is a product of when you convert your RRSP. Rolling over (converting) your RRSP to a RRIF will not result in taxation but the income payouts is considered taxable income. The basic purpose of an RRIF is to provide retirees with consistent payouts so that they can enjoy using their RRSP savings for their retirement expenses.
How to open a Registered Retirement Income Fund (RRIF)
To open a Registered Retirement Income Fund (RRIF) you can go to a financial institute such as a bank, a credit union, a trust, or an insurance company, you are also available to open more than one RRIF.
Registered Retirement Income Fund (RRIF) minimum withdrawals
When getting payouts from your RRIF, your withdrawals are based on a minimum yearly amount. This amount is calculated based on your age at the beginning of each year. You can also calculate your minimum amount based on your partner’s age. Once you make your decision, it is final.
When the holder of a Registered Retirement Income Fund (RRIF) passes away
When the original holder of an RRIF passes away, a beneficiary can be assigned, and the remaining funds can be transferred directly to the beneficiary’s RRSP, RRIF or a new annuity.
An annuity is similar to an RRIF, but is not registered with the government. It has a couple other differences compared to an RRIF but not too many. An annuity can be opened with a financial institution, and the annuity will outline the dates you will receive the consistent payments, and the amount you will receive. The annuity works when you transfer a lump-sum amount, typically from your RRSP, to a financial institution. They will then invest the amount, and provide you with consistent payments at scheduled intervals and additional possible income.
RRSP lump-sum withdrawal
You can also withdraw a lump-sum amount of your entire RRSP savings, but this will result in immediate taxation when you withdraw the lump-sum, and you will be required to claim the amount as income when you file your tax return.
Types of Registered Retirement Savings Plan (RRSP)
There are four types of RRSP accounts: an individual RRSP, a spousal RRSP, a group RRSP and a self-directed RRSP.
The individual RRSP option is the most common type of RRSP and is the basic RRSP option, where you open an RRSP and make contributions to the account throughout your lifetime. For tax purposes, the amount you contribute to your RRSP each year is deducted from your annual income.
The spousal RRSP is a plan registered in your spouse’s name, but contributions are made by you. Your contributions to the spousal RRSP will qualify you to deduct it from your income tax, but the savings belong to your spouse. As a result, if you earn more than your spouse and want to help them prepare for a more financially secure retirement, this account is for you. This account is also helpful if you are trying to minimize the income you must claim on your tax return.
Group RRSPs are created by employers, they are basically a collection of individual RRSPs. You can choose to be enrolled in the group RRSP if your employer offers this option, and you will have your contributions toward this RRSP deducted from your taxable income (your paycheque) immediately. This is beneficial because it deducts the taxes immediately from your income, and you also might have some choices about investing with your RRSP as well.
This is an RRSP where you invest the savings by yourself or with a licensed broker. This is for people who are willing to take more risk with their retirement savings because they have more personal control over their investments. You must be careful with your investments because certain investments might not be eligible for investing with the RRSP, and this can lead to a 1% tax on the specific investment.
Investing with a Registered Retirement Savings Plan (RRSP)
The best way to use your RRSP is to use it as a vehicle for investing. Depending on your risk tolerance, your time horizons, and your financial goals, you can speak to an experienced financial advisor to find out what investment option is right for you. You don’t need to have a high-risk investment either, there are plenty of low-risk investment options that have a great long-term rate of return.
These are the following investment options you can use to earn income in your RRSP: GICs, ETFs, bonds, stocks, and mutual funds. What makes these investments an attractive option is the fact that they are tax-deferred. Any income, such as dividends, capital gains, or interest, that is earned on your investments will not be taxed until they are withdrawn. This being said, it is best to not withdraw your RRSP savings until you’re actually retired, because your taxable rate will be much lower when you retire compared to when you’re employed.
Frequently Asked Question (FAQs) about Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings plan that is established by you and is registered by the government. You contribute to the RRSP throughout your life and once you retire you convert it to a Registered Retirement Income Fund to withdraw your income. RRSPs are an essential part of a secure retirement, and are extremely beneficial to young adults who are beginning to save for retirement and for those who are nearing their retirement!
- Income that is made in the RRSP through investments such as ETFs, mutual funds, stocks, bonds, and GICs are tax-deferred as long as the income remains in the RRSP account.
- The tax-advantaged portion of the RRSP is where the savings occur, year to year prior to your retirement. Any contribution made to your RRSP is tax-deductible, meaning that the contributions you make can reduce the amount of taxes you pay on the current year tax return.
- Your RRSP contribution room can be moved over to future years, or if it is unused. This is especially helpful to reduce taxes during your tax return.
- The RRSP account can be used by couples to reduce their individual taxes as well. For example, if you make more income than your spouse, you can contribute to their RRSP which will reduce the amount of taxes that you pay.
- You can withdraw money from your RRSP account without getting taxed immediately if the amount withdrawn is used towards purchasing your first home under the Home Buyers Plan.
- You can withdraw money from your RRSP account without getting taxed if the amount withdrawn is used towards your education under the Lifelong Learning Plan.
The Tax-Free Savings Account (TFSA) can hold various investment benefits, such as cash, stocks, bonds, GICs and mutual funds, the growth of which will not be tax-deductible. Any contribution or any income earned in the account is generally tax-free, even when it is withdrawn.
A Locked-In Retirement Account (LIRA) is an account meant for those who have an employee pension plan and leave their job. You have the option of transferring your pension plan savings into a LIRA, but you will not have access to the funds until you retire, hence it is locked-in.
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings plan. You contribute to the RRSP throughout your life and once you retire you convert it to a Registered Retirement Income Fund to withdraw your income. The RRSP has plenty of tax-deductible benefits and tax-advantages.
An RRSP is a retirement savings account, this account has tax-deferred benefits which can be used to hold investments and you will not be taxed on the income earned as long as the income earned remains in the account. The contributions that you make to your RRSP are tax-deductible. There is a yearly RRSP contribution limit, for the 2023 taxation year it is $30,780 and for 2022 the maximum contribution limit was $29,210. The maximum contribution limit can also be capped at 18% of your income, or the yearly contribution limit, whichever is lower. Additionally, there is also the carried over contribution room if you haven’t contributed the full yearly amounts throughout the years.
- Individual RRSP: The most common type of RRSP that you set up for yourself and make regular contributions to.
- Self-directed RRSP: This is an RRSP where you invest the savings by yourself or with a broker. This is for people who are willing to take more risk with their retirement savings as they have more personal control over their investments.
- Group RRSP: Group RRSP are created by employers, they are basically a collection of individual RRSP’s. You can choose to be enrolled in the group RRSP if your employer offers this option and you will have your contributions toward this RRSP deducted from your taxable income (your paycheque) immediately.
- Spousal RRSP: If you make a spousal RRSP, by contributing to the spousal RRSP, you will get you the tax deduction but the plan is registered in your spouse’s name therefore they are entitled to the accumulated savings.
The main reason why you should have an RRSP account is to save for your retirement, but the other great reason to have an RRSP account is to have the amount you contributed deducted from your annual income for tax purposes.
Anyone who is a Canadian resident can open an RRSP, meaning anyone from 0 to 71 years of age. Some financial institutions do require you to have an income and have filed a tax return.
You can contribute to an RRSP until the end of the year of your 71st year. You then can transfer your RRSP savings to a RRIF or purchase an annuity.
Most people access their RRSP when they retire or are nearing retirement, but truthfully you can access your RRSP whenever you want. There will be a tax penalty if a lump-sum withdrawal occurs, rather than letting the account mature when you’re 71 years old, or if you don’t convert it to an RRIF, or annuity when you retire.
In this case, your RRSP contribution limit will be reduced based on the amount of your employee-sponsored pension. The pension adjustment can be found on your T4.
There are some tax issues that you will most likely face if you withdraw from RRSP prior to maturity (when you’re 71 years old) or if you don’t convert it to an annuity or a RRIF. It is important to contact a financial advisor to find out what is the best course of action for you to make a smart decision when withdrawing from your RRSP.
The contribution limit in 2023 is $30,780 and in 2022 it was $29,210. Alternatively, the maximum amount you can contribute is 18% of your income or the maximum contribution amount, whatever is least.
Yes, your RRSP contributions are tax-deductible meaning that you can deduct your contribution amount when you file your taxes.
What happens if I don’t contribute the full amount each year in my Registered Retirement Savings Plan (RRSP)?
It is okay if you can’t or don’t contribute the full amount each year in your RRSP, because you can carry over your contribution room into the next year, and to future years since there is unused contribution room.
The younger the better, but even with that being said, it is better late than never. Being that anyone from 0 to 71 years old can make an RRSP, it is best to talk to a financial advisor and see if starting a RRSP is a good decision for you.
Up to 18% of the past year’s pre-tax income or the maximum contribution amount stated by CRA. The contribution limit in 2023 is $30,780 and in 2022 it was $29,210.
There are 3 options when withdrawing your money from your RRSP, you can withdraw it in cash, convert it into an RRIF, or buy an annuity.
- You can withdraw all the money in your account as you wish, but taking out a lump sum in cash will lead to the lump sum amount being taxed heavily.
- Converting it into an RRIF will allow you to continue to save your money and allow for growth as well. The RRIF is also tax-deferred and you must withdraw a certain amount from the RRIF per year, if you withdraw more than the specified amount you will be taxed.
- If you decide to buy an annuity, you will be provided with income for life, or until the age 90 years old. You will be taxed upon receiving the payments.
Can first time home buyers use their Registered Retirement Savings Plan (RRSP) to purchase their first home?
Yes, under the Home Buyers Plan you can use up to $25,000 from your RRSP to purchase your first home and your spouse can also use up to $25,000 for purchasing your first home as well. This being said, you must pay back the amount you borrowed within 15 years, or you will be taxed on the amount that you withdrew.
Yes, you can use your RRSP towards your education with the Lifelong Learning Plan. This plan allows you to withdraw $10,000 per year up to a maximum of $20,000. Similarly to the Home Buyers Plan, you will be required to pay this amount back within a certain time, and or you will be taxed on the amount you withdrew.
The spousal RRSP is a beneficial way for couples to save for their retirement, while also reducing the tax impacts due to their income. A spousal RRSP can operate separately from your own and your partner’s individual RRSP accounts. This spousal RRSP is ideal for couples who don’t make the same income annually. This helps the couple make contributions while reducing the amount of tax liability and evening out the amounts in their RRSPs, but remember that individuals are still only allowed a total contribution room of 18% of their income or the amount specified by the CRA, this amount does not change even if you contributed to your spouse’s RRSP.
For example: Partner A makes $100,000 per year and partner B makes $50,000 a year. Partner A can contribute up to $18,000 to their RRSP yearly, and Partner B can contribute up to $9,000 yearly. Partner A contributes $14,000 to their personal RRSP, and $4000 to Partner B’s RRSP, and Partner B puts in the $9,000 to their own account, then Partner A can still claim a total of $18,000 in tax-deductions, while it also levels it out for both partners so they have a similar amount in their RRSPs for when they retire. This levelling of account contributions is crucial once they retire, as the disparities can be large when receiving payments from their retirement savings. The way this works is simple, but it is strongly recommended to talk to a financial advisor to figure out how to best manage a spousal RRSP.
The RRSP contribution deadline is typically 60 days after December 31st, therefore it is usually on March 1st and sometimes on March 2nd. This deadline is important because any contributions made after this deadline cannot be deducted from your income until the following year.
If you contribute $2,000 over the maximum amount in your RRSP that is considered an over contribution. You will be penalized 1% per month that the over contribution is in your RRSP. To fix this, you can pay the penalty, you can withdraw the over-contribution amount if it was an honest mistake, or you can prove that the over-contribution is because you have unused room in your RRSP.
You can list a beneficiary to receive your RRSP savings when you die, there are some tax rules surrounding who the beneficiary is and how they receive the RRSP amount.
Wondering if a Registered Retirement Savings Plan (RRSP) is right for you?
The Registered Retirement Savings Plan (RRSP) is an essential savings account for both retirement planning and saving money for short and long term goals. Similar savings accounts like the LIRA, and the TFSA are great tools but they don’t have the same pros of an RRSP. The pros of the RRSP include tax-advantages, tax-deferred growth, options to use your RRSP savings prior to retiring, and it being secured from creditors. These important features are really beneficial and it is a great idea to open an RRSP, remember it is better late than never!
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To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta including areas such as Kingston, Oakville, Red Deer, and Vancouver.
Should a person turning 70 this year, contribute to RRSP? Would the contribution be a benefit to the person, or would it be better to put the contribution into a tax free savings account?
Ideally, you would want to put the contribution in a Tax-free Savings Account instead. The major reason being that your RRSP can only be contributed to and open until December 31st of the year you turn 71. I might be worth contributing to a RRSP if your main goal is to deduct taxes for the year, but otherwise it isn’t worth it.