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Registered Retirement Savings Plans (RRSP) in Canada

What is an RRSP and how does an RRSP work? Find out everything you need to know about investing in RRSPs in Canada.


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What is an RRSP?

An RRSP is a retirement savings and investment vehicle for Canadian workers and self-employed business owners. Its main advantage as a savings tool is to reduce your taxable income so you pay less income tax at tax time, and earn tax-free interest on your savings while it grows. Since it is really a “tax deferral” you will only pay income tax when you withdraw money from your RRSP (or RRIF) when your income will likely be lower, meaning you’d pay less in taxes at that tine.

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How does an RRSP work?

When you invest in a Registered Retirement Savings Plan, your money is usually held in cash or placed in stocks, bonds and other securities. You’ll only be able to contribute a certain amount of money to it each year, but this amount can be rolled over to future years if you can’t make your maximum contributions right from the beginning.

Whatever money you invest into your RRSP will grow with interest over the course of many years. When you enter retirement, you can withdraw your savings all at once or transfer the money to a Registered Retirement Income Fund (RRIF) or an annuity if you want a more sustainable stream of income.

General RRSP rules

There are a couple of RRSP rules to remember if you want to maximize your savings:

  1. RRSP contribution limits. You can contribute 18% of your earned income up to the maximum amount specified by the Canada Revenue Agency each year. Any contribution room you don’t use can be rolled over to future years.
  2. RRSP withdrawal rules. You’ll have to pay regular income tax and a withdrawal tax of 10-30% on any amount you take out of your RRSP early. You can only avoid paying this tax if you’re taking money out to pay for your education or your first home.
  3. RRSP age limits. These plans don’t have a minimum age requirement. The maximum age you can be with an RRSP is 71, though most people start making withdrawals at 65.

      Your RRSP contribution limit

      As of 2022, the maximum RRSP contribution limit is 18% of earned income up to a maximum RRSP contribution of $29,210 (whichever number is smaller). You’ll be able to carry forward any unused contributions to future years.

      For example, if your contribution limit is $20,000 and you put in $5,000, then you can carry forward $15,000. The contribution deadline is usually 60 days after the last day of the year you want to file (typically around March 1). For the 2023 tax year, the contribution deadline is Monday, March 1, 2024.

      How to calculate your RRSP contribution room

      You can calculate your RRSP contribution room by multiplying your pre-tax income by 18%. This means if you make $60,000 per year x 18%, then your contribution room for the year would be $10,800. You can also find out how much contribution room you have for the year in question on your previous year’s Notice of Assessment.

      For high-income earners, the maximum contribution is set by the Canada Revenue Agency. For example, the maximum RRSP contribution for 2022 is $29,210. This means that if you make a high salary, you can only claim the maximum amount even if it works out to less than 18% of your income.

      RRSP contribution rules

      Keep these RRSP rules in mind when calculating your contribution room to make sure you don’t over-contribute to your RRSP:

      1. Factor in employer contributions. You’ll want to account for RRSP contributions from your employer when you’re making your calculations. For example, some employers will pay into your plan using a Registered Pension Plan or Deferred Profit-Sharing Plan.
      2. Add in spousal plan contributions. Add the amount you have in your spousal plan to the amount you put into your individual plan to get a bigger picture of your overall contribution room.

      RRSP over-contribution

      The RRSP over-contribution penalty for making an over-contribution to your RRSP is 1% of the excess contributions in your account. For example, you’ll pay $30 a month to keep an excess contribution of $3,000 in your account (0.01 x $3,000 = $30). You’ll need to pay this penalty on any surplus you put in over $2,000 for as long as the over-contribution stays in your account. To avoid this penalty, you simply need to withdraw your excess funds.

      RRSP withdrawal rules

      When can you withdraw from an RRSP?

      When you turn 65, you can start making withdrawals from your RRSP without paying heavy penalties. You’ll have up until the age of 71 to make your withdrawals, at which point your RRSP will need to closed or transferred to another investment product, such as an RRIF. You can also make withdrawals before you turn 65 if you’re willing to pay a hefty tax.

      How can you make an RRSP withdrawal?

      You can make an RRSP withdrawal when you reach retirement age in one of three ways:

        1. Withdraw your funds as cash. You can withdraw the full amount of your RRSP in cash, which you can spend or save as you see fit. Just be careful when withdrawing large amounts since the money you take out will be taxed as income.
        2. Purchase an annuity. You can use this money to purchase an annuity. This is an insurance plan that will give you a guaranteed or set income for life. The money you use to purchase the annuity won’t be taxed, but you may be taxed when you start to receive a regular income.
        3. Transfer your RRSP into an RRIF. Similar to an annuity, you can transfer your RRSP into a Registered Retirement Income Fund (RRIF) without paying tax upfront. From there, you’ll receive a minimum amount each year (minus income tax) using a predetermined formula based on the value of the RRIF and your age.

        What is RRSP withholding tax?

        If you want to withdraw from your RRSP early, any withdrawal you make will be immediately subject to a withdrawal tax (also known as a “withholding tax”) proportional to how much you took out. RRSP withholding tax rates are outlined in the table below:

        Amount of withdrawalTax rate (across Canada)Tax rate (in Quebec)
        Up to $5,00010%5%
        Between $5,000 and $15,00020%10%
        Over $15,00030%15%
        If your marginal tax rate is higher than the RRSP withholding tax rate, you can also expect to pay additional income tax at the end of the year.

        Source: “Tax rates on withdrawals” by Government of Canada
        You’ll only be required to pay a withdrawal tax if you take money out early. This RRSP withholding tax won’t apply if you take your funds out after the age of 65.

        RRSP Home Buyers’ Plan (HBP)

        There are plans that are offered by the government that allow you to withdraw from your RRSP early without paying withdrawal tax. The HBP is one of them. Under the Home Buyers’ Plan, you can take money out of your RRSP to buy or build a first-time home for yourself or a family member with a disability. In 2019, the government set the withdrawal limit under this plan at $35,000. You’ll have up to 15 years to repay this money back into your RRSP without being taxed.

        Lifelong Learning Plan (LLP). The LLP is another plan offered by the government that allows you to withdraw money from your RRSP to pay for full-time postsecondary education for yourself or your partner. This money can’t be used to pay for your children’s schooling. In 2019, the maximum yearly withdrawal limit is set at $10,000 per year, up to a total limit of $20,000. You’ll have 10 years to repay this money back into your plan without being taxed.

        Advantages and disadvantages of an RRSP

        RRSP advantages

        • Contributions are tax deductible. You can claim your contribution as a tax deduction, which means you’ll lower your taxable income and pay less income tax.
        • Tax-free interest. You won’t pay taxes on any interest you earn, which is one of the biggest RRSP benefits available.
        • Regular income for retirement. You’ll be able to transfer your savings into an RRIF or an annuity when you retire to guarantee a steady income.
        • Education and home-buying plans. You can use part of your RRSP to pay for your education or your first home (as long as you eventually repay the amount you take out).

        RRSP drawbacks

        • Penalties for early withdrawals. You’ll have to pay a hefty withdrawal tax of up to 30% if you want to make an early withdraw.
        • Withdrawals are taxed as income. You’ll be required to pay income tax on any withdrawals.
        • Limits on contribution room. You’ll only be able to contribute a certain amount each year and you’ll need to pay penalties for making an RRSP over-contribution.

        RRSP contributions: eligible investments

        There are two investment options that you can take advantage of: fixed-income assets and equities. Fixed-income assets are bonds, guaranteed investment certificates and cash held in an investment savings account. Examples of equity investments are publicly-traded stocks and equity exchange traded funds (ETFs).

        Examples of RRSP investment options

        The following assets and equities are RRSP eligible investments:

        • Income trusts
        • Mortgage loans
        • Foreign currency
        • Labour-sponsored funds

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        What is a Spousal RRSP?

        A Spousal RRSP can be used by married or common-law partners as a way to lower their collective taxes upon retirement. Typically, the higher-earning partner will contribute to the Spousal RRSP, which is registered under the name of the partner making less income. The lower-income spouse makes the investment decisions and is the only one who can withdraw from the account. Before retirement, the contributor to the account deducts the contributions to the Spousal RRSP from their taxable income just as they do for their individual account. It’s important to know that your contribution limit does not change if you are contributing to both an Individual and Spousal RRSP. Instead, the annual contribution limit is spread among your RRSPs.

        Group RRSPs and Pooled RRSP

        In addition to an Individual RRSP and a Spousal RRSP, there are two other RRSP types: a Group RRSP and a Pooled RRSP. A Group RRSP is established by a company for its workers with contributions deducted from their paycheques. A Pooled RRSP is a retirement vehicle created for small business workers and employers as well as for the self-employed.

        Opening an RRSP

        It’s easy to open an RRSP account if you know where to start. Check out some of the most commonly asked questions and who’s eligible below.

        • How do I open an RRSP account? Fill out an application with the provider of your choice to sign up for an account. Just be aware that you may need to submit personal information such as your full name, address, birthdate and Social Insurance Number (SIN) to get started.
        • Who can open an RRSP account? Anyone can open one for themselves or their dependants, and there’s no minimum age to be eligible. You can hold an one in your name until you reach the age limit of 71 years old, at which point you’ll need to withdraw your funds or transfer your account to an annuity or RRIF.
        • Where can I open an account? You can open an account with any eligible providers that offer Registered Retirement Savings Plans. This can include big banks, credit unions, digital banks and dedicated online providers. Just be sure that the provider you sign up with is one that you know and trust.

        RRSP fees

        The management fees you’ll pay will depend on which provider you go with. You can save money on fees if you put your money with a reputable robo-advisor or self-directed trading platform. You’ll typically pay higher fees with mutual fund providers, big banks and private investment managers.

        What are an RRSP’s interest rates or rates of return?

        The interest rate you’ll get will depend on what type of investments you have and how they perform over time. For example, GICs are considered low-risk investments and often pay anywhere from 0.10-3% annually in interest, depending on the length of your term. You can generally make more from bonds, though the yield is still relatively conservative.

        You can also invest in mutual funds, which are a mix of both stocks and bonds. These will often give you a higher return, though they may come with a higher level of risk. Many investors also choose to invest in exchange-traded funds using a self-directed platform or robo-advisor such as Wealthsimple. (Read our review on Wealthsimple.) This brings down the cost of management fees, which means you keep more money in your pocket.

        Bottom line

        Registered Retirement Savings Plans are one of the best ways to save for retirement in Canada. They let you earn tax-free interest on your savings and you can take advantage of tax breaks for every dollar you invest. The main downside of these funds is that it can be difficult to access the money you save until you retire without paying hefty penalties.

        RRSP FAQs

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