Siddhi Bagwe
Beth Buczynski
The most popular type of account for retirement savings in Canada is a registered retirement savings plan, more commonly known as an RRSP. In 2022, the last reported year, 21.7% of tax filers made RRSP contributions.[1]
What is an RRSP?
An RRSP is a retirement savings plan that Canadians can open and contribute to up until the age of 71.
RRSPs are registered with the government and any income you earn on your RRSP savings or investments is exempt from taxes until withdrawal. Additionally, contributions made to an RRSP account can be deducted from your annual income to reduce your tax burden.
How does an RRSP work?
Individuals who open an RRSP can make annual contributions up to a predetermined amount. Since RRSPs are tax-deferred accounts, any interest or investment income earned within the RRSP will not be taxed until it’s withdrawn.
After December 31 of the year in which you turn 71, your funds need to either be withdrawn, converted into a registered retirement income fund (RRIF) or used to purchase an annuity.
Types of RRSPs
Before you open an RRSP, consider which type of RRSP best suits your financial situation.
- Individual RRSP: a registered account in your name. You make contributions as well as reap the tax benefits on your RRSP.
- Spousal RRSP: an account created in your spouse’s name, but you make contributions and get the deduction. This plan allows you to split your RRSP income and benefit from lower tax bills for a given year.
- Group RRSP: a pooled plan offered by your employer. Your contributions are typically deducted from your pay and managed through the employer’s financial institution at a low fee.
RRSP investment options
You can choose to have an advisor at a financial institution manage your investments. Alternatively, you can opt for a self-directed RRSP with a discount brokerage firm online as a DIY investment option if you have the time and experience to manage investments. Or, use a robo-advisor to help you make the investment decisions.
Depending on the kind of RRSP you sign up for, you’ll have a variety of investment options to hold in your RRSP. These investments include:
Guaranteed RRSPs
While guaranteed investment certificates (GICs) held within an RRSP earn interest and are one of the safest options out there, the investment returns are very low.
Mutual Fund RRSPs
RRSP-eligible mutual funds are usually managed by a financial advisor at your institution of choice. However, this management often comes at a higher fee.
Savings Account RRSPs
Essentially a regular or high-interest savings account structured as an RRSP, this is a safe investment option but may yield low returns compared to other methods.
» You can compare some of our top picks for the best high-interest RRSPs in Canada to find the right account for your needs.
How much should I contribute to an RRSP?
When deciding how much money to divert to your RRSP, keep the following rules and considerations in mind:
Contribution limits
You can contribute only a certain amount to your RRSP every year, called your RRSP contribution limit. This limit is 18% of your earned income from the previous year, up to a predetermined maximum set out by the CRA, which changes annually. You can also utilize any unused contribution room carried forward from previous years.
Note that exceeding the contribution limit by over $2,000 will result in a penalty fee. The tax charged is usually 1% of the excess contribution per month.
RRSP withdrawals
As long as your account is not a locked-in RRSP — also called a locked-in retirement account, or LIRA, in some provinces — you can technically withdraw funds at any time.
However, because RRSP most withdrawals are taxable, — the Home Buyer’s Plan and Lifelong Learning Plan programs are notable exceptions —a certain percentage will be withheld by your financial institution. The withholding tax rate can range from 10% to 30%, depending on your location and the amount taken out for income tax.
Keep in mind that the tax withheld may not be enough to cover your tax bracket and you may end up having to pay even more come tax time. It is also important to understand that you lose the contribution room once you have withdrawn money from your RRSP.
» MORE: How an RRSP compares to an Tax-Free Savings Account (TFSA)
RRSP Contribution Calculator
RRSP pros and cons
An RRSP may be appealing for anyone who wants to start saving for retirement or to save for a new home while taking advantage of the tax deferral it provides. However, it might be worth considering your personal saving goals as well as exploring the pros and cons before opening a registered account.
Pros
- Easy way to save for your future.
- Tax-deferred contributions and investment earnings.
- No minimum age requirement.
Cons
- Tax-deferred is not the same as tax-free; you do pay tax on the money upon withdrawal.
- Contribution room is based on income.
- Mandatory conversion to an RRIF or annuity before age 72.
How to open an RRSP
Enrolling in a group RRSP is straightforward since you’ll follow the set instructions provided by your employer’s financial institution. But the process of setting up an individual or spousal RRSP will be more similar to how you would open a bank account. It helps to go through the same phases of research to choose the right financial institution.
- Places to get an RRSP. Based on your banking habits, it could be a traditional brick-and-mortar bank, online bank, credit union, trust or insurance company.
- RRSP investment options. You may want to choose a bank that offers the type of RRSPs and investment options that match your personal goals, risk level and management fee expectations.
To open an RRSP, you’ll need to fill out an application form to open your account, either in person or online at the bank of your choice. If you’re not an existing account holder, you will need:
- Be a Canadian resident below the age of 71.
- One piece of government-issued ID.
- A social insurance number (SIN).
- To have earned an income and filed a tax return in Canada.
Since there’s no minimum age requirement, a parent or legal guardian can help a minor who has a Canadian employment income and file a tax return to open an RRSP account.
You can then begin contributing to the RRSP by making deposits into the account via online banking. You can choose to contribute annually with a lump sum deposit or set up automatic contributions or pre-authorized debits to be deposited into the account throughout the year.
RRSP rules and tax considerations
There are a few rules and considerations to keep in mind when it comes to RRSPs. These include:
Contribution limits
You can contribute only a certain amount to your RRSP every year, called your RRSP contribution limit. This limit is 18% of your earned income from the previous year, up to a predetermined maximum set out by the CRA (this amount changes annually), plus any unused contribution room carried forward from previous years.
RRSP withdrawals
As long as your account is not a locked-in RRSP (also called a locked-in retirement account, or LIRA, in some provinces), you can technically withdraw funds at any time. However, because withdrawals are taxable (except when made under the Home Buyer’s Plan or Lifelong Learning Plan programs), the financial institution under which you hold your RRSP will withhold a certain percentage (10%-30% in most of Canada, depending on the amount taken out) for income tax.
Keep in mind that the tax withheld may not be enough to cover your tax bracket and you may end up having to pay even more come tax time. It is also important to understand that you also lose the contribution room once you have withdrawn money from your RRSP.
Alternatively, you can see how an RSP compares to an RRSP and the best option to support your investment goals.
Frequently asked questions about RRSPs
If you hold investments such as stocks and bonds within your RRSP, you should expect the balance to fluctuate, as it would in any investment account. If you withdraw your money early, you lose the contribution room and therefore the tax-deferred compound interest and investment gains you could have earned on the full amount.
It depends on how, or if, you name a beneficiary on your RRSP.
Suppose the beneficiary is a spouse, common-law partner or a financially dependent child or grandchild with a mental or physical disability. In that case, the RRSP is typically rolled over to the beneficiary on a tax-deferred basis.
Suppose you name other beneficiaries, or none at all. In that case, the commuted value of the RRSP will be reported as taxable earnings on your final income tax return, which is prepared and filed by your estate’s executor.
Eligible deposits, such as GICs or term deposits, held within RRSPs are protected by CDIC insurance up to prescribed maximums, so long as the financial institution you choose is a CDIC member.
Article Sources
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Statistics Canada, “Registered retirement savings plan contributions, 2022,” accessed November 22, 2024.
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