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What Is a Registered Retirement Savings Plan?

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Last updated on December 23, 2021

The RRSP has been around for years, and most Canadians will use one at some point in our lives. But is it a savings account? An investment account? And what does the “registered” part of Registered Retirement Savings Plan mean?

We’re going to take an in-depth look at RRSPs and explain everything about them from the ground up.

What Is an RRSP?

Let’s start with the absolute basics: RRSP is short for Registered Retirement Savings Plan. The “registered” part refers to the fact that it is registered with the federal government. This registered status means that RRSPs are subject to some tax advantages designed to make saving for retirement easier.

RRSPs Help You Defer Taxes

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You may have heard friends and family talking about how their RRSP contributions earn them a refund from the Canada Revenue Agency at tax time, and maybe you want to get in on that action. But before you dive in, it’s important to understand how these refunds work.

When you contribute to your RRSP, those contributions are tax-deductible, meaning you don’t pay tax on any money you put in your RRSP. Because you don’t pay tax on your contributions, you’ll usually end up with an income tax refund.

For example, if you earned $60,000 in one year, and you contributed $10,000 to your RRSP, the government would deduct that $10,000 from your $60,000 income. Your new taxable income is $50,000. But the income tax collected by your employer (called ‘withholding tax’) was based on a $60,000 income, so you’ll get back what you overpaid as an income tax refund.

Related: Everything You Need to Know About Tax Returns in Canada

The money that you contribute to your RRSP also grows tax-free. You won’t pay any taxes on the interest, capital gains, or dividends earned inside this account until you withdraw it. If all of this tax-free talk sounds too good to be true, it’s because the tax-free status only applies to contributions and interest earned. Once you are ready to withdraw money from your RRSP in retirement, your withdrawals are considered income, and that’s when you’ll pay tax on it.

Let’s reiterate: When you withdraw money from your RRSP in retirement, you will pay tax on it.

Because RRSPs defer taxes until retirement, you can maximize your tax savings if you contribute to your RRSP during your higher earning years and withdraw the money in retirement when you are in a lower tax bracket.

Related: How to Pay Less Taxes in Canada

How Much Can You Contribute?

You can contribute 18% of last year’s earned income to an RRSP, up to a maximum annual contribution limit stipulated by the federal government. The maximum contribution limit for 2022 is $29,210; for 2021 it was $27,830. If you don’t use all of your contribution room, you can carry it forward to contribute in the following years. You can check your unused contribution room in your previous year’s notice of assessment or through the CRA website.

Contributions made within the first 60 days of the current year will apply to the previous year’s tax return. For example, the contribution deadline for 2021’s tax return will be March 1, 2022.

How Do RRSP Contributions Work?

Usually, when you think of an account at a financial institution, you think of savings accounts, chequing accounts, Guaranteed Investment Certificates, or investment accounts. These accounts are defined by the type of asset contained within them.

RRSPs are much more flexible than that and can hold different types of assets. Think of your RRSP as a tax-deferred basket, into which you can put:

  • Cash
  • GICs
  • Bonds
  • Stocks
  • Mutual funds
  • Exchange-traded funds (ETFs)

Everything you put into your RRSP will grow tax free until you withdraw it in retirement, so most Canadians choose a mixture of higher growth investment options, instead of just cash.

Who Should Open an RRSP?

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RRSPs work best for anyone who is currently earning a higher income than they plan to in retirement.

For example, if you currently earn $80,000 annually, and you estimate your retirement income from your savings will be $50,000 per year, an RRSP is a perfect way to save for retirement and defer taxes to a time when you’ll earn a lower income.

In contrast, if you are newly graduated and earning just $35,000 per year, but you plan to have a $50,000 income in retirement, an RRSP won’t be advantageous to you at this time. Instead, you could consider contributing to a Tax-Free Savings Account.

Whatever your current financial status may be, you will likely want to open an RRSP at some point in your lifetime—and it’s becoming more and more standard to do so: According to the 2021 edition of BMO’s annual Registered Retirement Savings Plan (RRSP) study, Canadians have an average of $112,295 in their RRSP accounts, which is a rise of an additional $32,803 since 2015 (41% increase).

Types of RRSPs

Individual RRSP

This is the most prevalent RRSP account type. It’s registered with one person, who also serves as its contributor.

Spousal RRSP

A Spousal RRSP is registered to one person, whose spouse is the account’s contributor. The spousal contributor benefits from reduced taxable income, but the account’s assets belong to the spouse registered with the account. Spousal contributors of any age can make contributions to their spouse’s RRSP account, but contributions must end by the year the registered spouse turns 71.

Group RRSP

A company may offer a Group RRSP, in which deductions are regularly made from participating employees’ paycheques and then collectively diverted into investment funds. Group RRSPs have some advantages: Payroll deductions reduce taxable income immediately, and many employers match their employees’ contributions up to a set limit. That said, investment options in Group RRSPs are limited to what the RRSP’s manager selects, which may frustrate employees who prefer a more free investing hand.

Other Uses for an RRSP

Though the RRSP is primarily associated with retirement planning, it can also be utilized in a few other ways.

Home Buyer’s Plan

The Home Buyer’s Plan (HBP) allows withdrawals of up to $25,000 from your RRSP to buy your first home. (Check out our beginners’ guide to mortgages for first-home-buying tips.) You can withdraw this money from your RRSP without penalties, but you have to pay it back within 15 years. If you don’t repay the money over the 15-year period, it is considered income and subject to the same 10-30% penalty as a regular RRSP withdrawal.

Lifelong Learning Plan

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The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 per calendar year or $20,000 total for you or your partner to attend a qualified post-secondary institution. You don’t pay any penalties on the money you withdraw as long as you pay it back within ten years. If you don’t pay back the money you withdrew, that money is considered income, and subject to the same penalties as not paying back the HBP on time.

How to Cash in Your RRSP

If you withdraw cash from your RRSP before retirement, you’ll pay a penalty of between 10 to 30% of the amount you withdraw, and you unfortunately won’t get the amount withdrawn added back to your future contribution room. This stiff penalty means that, aside from the two exceptions above, your RRSP should only be used to save for retirement and you shouldn’t touch that money until you retire.

You must close your RRSP when you turn 71. At that point, you can withdraw money from your RRSP in cash; convert your RRSP to an RRIF; or buy an annuity.

Where Can You Find RRSPs?

Banks

While your first impulse may be to head to your usual bank branch and set up an RRSP there, you should look at other options as well. Canada’s Big Five banks typically offer paltry interest, but some digital-only banks offer 10 times or more the interest rate over the RRSPs you would get at an old-school, brick-and-mortar bank.

Credit Unions

Unlike banks, credit unions are nonprofit financial institutions owned by their members. Your local credit union may offer an RRSP with a better interest rate than most banks, and the advice you’re given about opening and funding the RRSP may be more objective than what a bank will provide. Credit unions may also offer more favorable loan interest rates than a bank, which could make it more fiscally responsible for you to borrow money to contribute to your RRSP.

Robo-Advisors and Online Brokers

Another option worth considering is to open an RRSP account designed to earn investment income. Investment accounts don’t just sit there gathering interest, rather, this kind of an RRSP invests in stocks, ETFs, and mutual funds to generate returns that you can use when you hit the eligible age to pull money out of your RRSP. The risk with an investment RRSP is that you could lose money if your investments go bad, but the flip side is that you could enjoy much better returns if the stock markets are healthy.

Related: How to Start Investing the Smart Way

If you don’t want to manage your own investment portfolio you can go with a robo-advisor like Questwealth Portfolios or Wealthsimple Invest. Robo-advisors set you up with a pre-built portfolio of investments based on your risk tolerance, and then periodically rebalance the portfolio for you.

On the other hand, if you like the idea of managing your own RRSP investment portfolio you can set up a self-directed investment account, which allows you to independently buy and sell the assets held in your RRSP. You can experiment with making your own trades in a low-risk setting by seeking out an online broker with no account minimums or commission fees, like Wealthsimple Trade.

Related: Best Online Brokers in Canada

Final Thoughts

RRSPs are a great way to save for retirement and defer your taxes until you reach a point in your life when you are in a lower tax bracket. You can open an RRSP at a major bank and invest in mutual funds, or through a robo-advisor for a passive investing strategy using ETFs. Whatever you choose, the important thing to remember is that the money isn’t taxed now, but it is when you withdraw it. Be sure to factor that into your retirement calculations, and you’ll be on your way to a well-funded retirement.

FAQs

Yes, you can lose money in an RRSP if investments you’re holding in the RRSP (ETFs, stocks, mutual funds, etc.) depreciate in value. You can also lose money if you withdraw cash from the RRSP at the wrong time; you don’t want to withdraw at a time when your marginal tax rate will be high.
The amount that an RRSP contribution can reduce your taxes varies depending on which tax bracket you’re in, how much you contribute to your RRSP, and what province you live in. Tax refunds may range from between 10%–60% of the amount you contributed to your RRSP.
If you want to withdraw funds from an RRSP before age 71, you can avoid tax liability by withdrawing via either the Home Buyers Plan or the Lifelong Learning Plan, though you’ll need to gradually repay the funds back. You can then minimize what will be your ultimate tax liability for RRSP withdrawals by converting the account to an RRIF at age 71 and/or withdrawing at a time when you’re in a low tax bracket.
In the event of your death, assets held in the RRSP are transferred to the beneficiary you designated when opening your RRSP. The beneficiary can be your own estate, a charity of your choice, or a designated individual. The way an RRSP is transferred to an individual beneficiary varies depending on the beneficiary’s age, and may include transferring the RRSP’s assets into the beneficiary’s own RRSP or RDSP; cashing out the RRSP and paying applicable taxes; or using the RRSP to purchase an annuity.

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Author Bio

Jordann Brown
Jordann Brown is a freelance personal finance writer whose areas of expertise include debt management, homeownership and budgeting. She is based in Halifax and has written for publications including The Globe and Mail, Toronto Star, and CBC.

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