A Registered Retirement Savings Plan (RRSP) is one of Canadians’ most popular and beneficial retirement savings accounts. RRSPs provide tax-advantaged growth and flexibility to save for your future.

This guide will explain everything you need to know about RRSPs, including how they work, their benefits, contribution limits, investment options when you can withdraw funds, and how RRSPs differ from other accounts like TFSAs.

We’ll also provide tips and strategies to help you maximize your RRSP contributions so you can build your nest egg for a comfortable retirement.

What is a RRSP?

An RRSP is a registered account that allows Canadians to save and invest for retirement in a tax-advantaged way. Some key features of RRSPs:

• Contributions are tax-deductible – you can deduct your contributions from your taxable income.
• Growth and interest are tax-deferred – you don’t pay tax on any investment gains or interest earned inside the account until you withdraw.
• Administered by the Canada Revenue Agency (CRA), contributions are tax deductible up to an annual limit.
• You can hold a wide variety of investments inside an RRSP account.
• Withdrawals are taxed as income in the year they are withdrawn.
• Any unused RRSP contribution room can be carried forward indefinitely.
• You must convert your RRSP into a Registered Retirement Income Fund (RRIF) or purchase an annuity by the end of the year you turn 71.

In summary, RRSPs allow you to save for retirement in a tax-efficient manner while having flexibility and choice over your investments. The tax deductions and tax-deferred growth provide significant advantages for retirement savings.

How Does Registered Retirement Savings Plan Work?

RRSPs provide two main tax advantages:

1. Tax deductions – Any contributions you make to your RRSP are deductible on your tax return, lowering your overall taxable income. This helps reduce the income tax you owe.
2. Tax-deferred growth – All the investments and interest growth inside your RRSP are shielded from taxes. You only pay tax when you eventually withdraw funds in retirement.

For example, let’s say you contribute $5,000 to your RRSP this year. You can deduct this $5,000 from your total taxable income for the year. If you are in a 30% tax bracket, contributing to your RRSP lowers your tax bill by $1,500 (30% of $5,000).

The $5,000 grows tax-free inside your RRSP account over the years. When you withdraw funds in retirement, the withdrawals are added to your taxable income and taxed at your income tax rate for that year. Since you’ll likely be in a lower tax bracket in retirement, you end up with significant tax savings by using an RRSP.

Any unused RRSP contribution room carries forward indefinitely, allowing you to make larger catch-up contributions in the future when you may be earning more income.

What are the Benefits of Registered Retirement Savings Plan?

Here are six main benefits of using an RRSP for retirement savings:

• Tax deductions – As mentioned earlier, contributing to your RRSP lowers your taxable income. Most Canadians get an immediate tax refund when they contribute to their RRSP.
• Tax-free growth – All the investment growth inside your RRSP is shielded from taxes like capital gains or dividend taxes. This enables faster growth compared to non-registered accounts.
• Flexibility – You can hold different types of investments inside your RRSP account, such as stocks, bonds, mutual funds, GICs, ETFs, etc. You can change your investment mix at any time.
• Early withdrawal – Unlike other pension accounts, you can withdraw funds from your RRSP any time. Though withdrawals are taxed as income, this flexibility is beneficial.
• Creditor protection – Assets inside your RRSP are generally exempt from creditors in case of bankruptcy or debt.
• Spousal RRSPs – You can contribute to a spouse’s RRSP to split retirement income and lower your household’s overall taxes.

What is the RRSP Contribution Limit?

The CRA sets the maximum RRSP contribution limit each year based on your previous year’s earned income and unused contribution room carried forward. For 2024, the RRSP limit is:

• 18% of your earned income, up to an annual maximum dollar limit ($31,560 for 2024) (Source)
• Minus any pension adjustment
• Plus any unused contribution room from previous years

You can find your personal RRSP deduction limit for 2024 on your Notice of Assessment from the CRA. The unused room continues indefinitely, allowing you to contribute more in future years. The contribution deadline is March 1 the following year.

You can contribute to your RRSP until the end of the year you turn 71. Your RRSP provider will report your contributions to the CRA and track your available room.

What Can You Contribute to an RRSP?

One of the great benefits of RRSPs is that you can hold many different types of eligible investments within your account. Here are the common options:

• Cash – Savings accounts, money market funds, etc.
• GICs – Guaranteed Investment Certificates are low-risk fixed-income investments offered by banks and credit unions. They are popular with conservative investors.
• Mutual funds – Professionally managed investment funds that hold assets like stocks, bonds, and cash based on stated objectives. A simple way to invest in markets.
• Stocks – Shares of publicly listed companies traded on stock exchanges. Provides ownership stake in a company.
• Bonds – Issued by governments and corporations to raise capital and pay interest. Lower risk than stocks but higher than GICs or savings accounts.
• ETFs – Excellent low-cost way to get broad exposure to stock and bond markets. Traded like stocks on exchanges.
• REITs – Real estate investment trusts that invest in commercial real estate like offices, apartments, shopping malls, etc. Must pay distributions to unit holders.

Diversifying your RRSP across different asset classes and geographic regions helps reduce risk and volatility. Many robo-advisors now offer low-cost, professionally managed RRSP portfolios.

What is the Deadline for RRSP Contributions?

To get an RRSP tax deduction for the current year, you must contribute by March 1 of the following year.

For example, to claim an Registered Retirement Savings Plan contribution on your 2022 taxes, you must contribute by March 1, 2023. Contributions made between March 2, 2023, and December 31, 2023, will count towards your 2023 taxes.

If you contribute in the first 60 days of a year, you can elect to count it for the current or previous tax year. This provides some flexibility if you miss the deadline.

The sooner you make your contribution, the earlier it starts growing tax-free in your RRSP account.

When Can You Withdraw Funds from an RRSP?

Unlike other retirement accounts, you can withdraw funds from your RRSP at any time for any purpose. However, all withdrawals are added to your taxable income for the year except for a few special exemptions.

Here are some key points on RRSP withdrawals:

• Withdrawals are taxed at your marginal tax rate for the year – which is usually high before you retire.
• Up to $35,000 in RRSP funds can be used towards a first-time home purchase through the Home Buyers’ Plan.
• You can withdraw $10,000 – $20,000 tax-free for full-time education through the Lifelong Learning Plan.
• Starting at age 55, up to $4,000 can be withdrawn annually from a spousal RRSP with lower tax rates.
• At age 65, qualifying pension income can be split between spouses to lower taxes.
• You must collapse your RRSP into a RRIF or annuity by December 31 of the year you turn 71.

While withdrawals can provide access to funds in an emergency, consider the tax implications carefully.

Read more: Canada Individual Retirement Accounts

What Happens at Age 71?

By December 31 of the year you turn 71, your RRSP account balance must be converted into one of the following:

• RRIF – A Registered Retirement Income Fund (RRIF) pays out at least a minimum amount each year as retirement income. RRIF withdrawals are taxable. Failure to set up a RRIF will lead the CRA to tax your entire RRSP balance.
• Annuity – An insurance company converts your capital into guaranteed lifetime income. Popular option to receive fixed payments.
• Lump-sum withdrawal – You can collapse your RRSP and withdraw the entire balance. The lump sum will be taxed as income in that year.

Converting to a RRIF provides flexibility to tailor your retirement cash flow. The RRIF minimum payment is based on a percentage of your age and account balance. Remember, RRIF withdrawals are taxable income. Annuities provide guaranteed income for life but little flexibility.

RRSP vs. TFSA – Which Is Better?

RRSP and Tax-Free Savings Accounts (TFSA) are both popular savings and investment accounts for retirement. But which is better for you? Here are some key differences:

Based on your current income, expected retirement income, and savings goals, you can decide which account is more suitable as per your financial situation. Many people utilize both RRSPs and TFSAs at different life stages to maximize savings.

Expert Tips to Maximize Your RRSP Contributions

Here are some tips from the experts on how to make the most of your RRSP contributions:

• Contribute early and maximize account growth – Try to maximize your RRSP contributions early in the year rather than waiting until the deadline. Your funds will benefit from more tax-sheltered growth for a more extended period of time, amplifying the power of compounding.
• Contribute when income is high – Make the majority of your contributions during your peak earning years when you are in a higher tax bracket. The tax savings impact will be greater.
• Carry forward unused room – Don’t worry if you cannot maximize your contributions every year. The unused RRSP room gets carried forward indefinitely. You can make larger catch-up contributions in the future.
• Withdraw to recontribute – If you face a sharp drop in income, you can withdraw funds from your RRSP to recontribute in a lower tax bracket and enjoy the tax deduction benefits again.
• Spousal RRSPs – If you and your spouse are in different tax brackets, contribute to the lower earner’s account to split income later.
• Hold eligible investments – Choose suitable RRSP investments based on your goals, time horizon and risk appetite to grow your savings.
• Rebalance periodically – Rebalance your portfolio back to target allocations periodically to reduce risk and maximize returns.
• Convert to RRIF by 71 – Be sure to convert your RRSP to a RRIF or annuity once you turn 71 to avoid punitive taxes.

By following these tips and utilizing RRSPs wisely as part of your overall retirement plan, you can supercharge your savings and enjoy a comfortable retirement.

The Bottom Line

RRSPs are one of the best accounts available to Canadians to save and invest for retirement on a tax-efficient basis. The tax deductions, tax-deferred growth, flexibility, and other employee benefits make RRSPs a powerful component of your overall retirement plan.

FAQs on Registered Retirement Savings Plans (RRSPs) in Canada