For many Canadians, saving for retirement can be an overwhelming and complicated journey. Starting is often the hardest part. Registered Retirement Savings Plans (RRSPs) are accounts registered with the Canada Revenue Agency (CRA) that help you save for retirement or other goals. To make it easier, we created a simple guide to understanding RRSPs. In this post you’ll learn about:
- Advantages and disadvantages of RRSPs
- Different types of RRSPs
- What you should know when opening an account
- How to access your savings when you retire
Save the date: March 1, 2023, is the deadline for contributing to your RRSP for the 2022 tax year. December 31 of the year you turn 71 years old is the last day you can contribute to your own RRSP.
Advantages & Restrictions of Using RRSPs
Like any investment account, RRSPs have advantages and limitations.
Some advantages include:
- Income tax deductions based on your contributions
- Defers tax on income and gains on investments within the account, which increases the power of compounding
- Tax-free transfers between RRSPs
- The ability to hold multiple accounts (but beware of possible higher fees and holding costs)
Some restrictions and limitations associated with RRSPs:
- Not all investments are acceptable holdings within an RRSP
- All withdrawals are taxable, and taxed as other income (vs. as dividends or capital gains)
- Mandatory conversion of your RRSP account(s) by the end of the year you turn 71
- An annual contribution limit of $29,210 for the tax year 2022 or 18% of your earned income for the previous year, whichever is lower*
*There are other factors that can affect your contribution room, for example, participation in multiple retirement savings vehicles (e.g., if you have a company pension plan, your contribution limit will be reduced). The CRA keeps track of your contribution limit and can help find that information for you.
Types of RRSPs
There are three types of RRSP accounts that you may open (you can hold multiple accounts).
- Individual: This account is registered in your name. Any investments held and tax advantages belong to you.
- Spousal: This RRSP allows you and your spouse to split income more evenly in retirement. To qualify, you must:
- Have lived together for at least 12 months
- Have a child together by birth or adoption; or
- Share custody and support of your partner’s children
- Group: Your employer may offer group RRSPs as a benefit. These are individual accounts that permit contributions to be made through your employer. Employers may also contribute to the employee accounts. Group RRSP contributions are generally locked-in until you turn 71.
Three Things You Should Know Before Opening an RRSP
Before opening an RRSP account, be sure to research, gain an understanding of, and consider the following factors.
1. The services and accounts that are offered by different firms and institutions.
Depending on where you decided to open your account(s), you could encounter:
- Different account services (advised vs. self-directed)
- Different available investments
- Different account costs
You may choose to seek professional advice from an investment advisor at a financial institution such as a bank, credit union, trust or insurance company and set up a registered retirement savings plan through them.
You may also choose to set up a self-directed RRSP if you prefer to choose and manage the investments yourself.
Regardless of the option you choose, be sure to learn about all the options available to you and all the fees and charges associated with your account.
2. The types of investments available for you to purchase through your account.
RRSPs can hold a variety of investment vehicles, including:
3. The costs associated with your account.
Fees vary depending on your firm or advisor. There are four main types of fees to be aware of:
- Opening and closing an account. Some firms will not charge you a fee to open an account, but there is almost always a fee associated with closing an account.
- Monthly, quarterly, or annual account maintenance fee. Some firms will charge you a flat or percentage fee to provide advice, and sometimes fees will fall or be waived if your account grows. It’s important to understand the fees you will pay before you open an account.
- When you make an investment decision. The firm may charge a fee (called a commission) when you make a trade and may charge other fees too (e.g. to buy an investment denominated in another currency).
- Costs embedded into the type of investment you buy. For example, mutual funds and ETFs charge annual fees to the fund for management and other services that will reduce your overall investment return. This article will help you learn about various fees, costs, and terms you may see when looking at a mutual fund.
Securities regulations require your firm or advisor to provide you with an annual Charges and Compensation Report detailing the cost of the fees you pay and the services you receive.
Use our Investment Fee Calculator to take a look at how different fees impact your returns.
Withdrawing Money from Your RRSP
You can make a withdrawal from your RRSP at any time as long as your funds are not in a locked-in plan. It is important to remember, however, that you will have to pay tax that year on the amount you withdraw (and to ensure that you do, tax will be withheld from what you withdraw).
The following two Government of Canada programs allow you to borrow money from your RRSP tax-free, if you meet the CRA’s eligibility criteria and other conditions:
- Home Buyers’ Plan (HBP): Under this government program, you can withdraw up to $35,000 from your RRSP to pay for a down payment when you buy your first home. You won’t pay any tax on the withdrawal as long as you repay it over the next 15 years.
- Lifelong Learning Plan (LLP): You can withdraw up to $10,000 in a calendar year ($20,000 in total) to pay for full-time education or training for you or your spouse, and you won’t pay any tax on the withdrawal as long as you repay it back over a period of 10 years.
How to Access Your Savings When You Retire
When you retire and close your RRSP, you have the option to withdraw your savings as a lump sum (remember, taxes will be withheld) or convert them into an income stream. There are two retirement income options:
- You can convert your RRSP to a Registered Retirement Income Fund (RRIF). Learn more about RRIFs.
- Use your RRSP savings to buy an annuity. Learn more about annuities.
Make Informed Decisions about RRSPs
If you have any complex RRSP-related questions, be sure to do in-depth research if you invest using a self-directed account, or consult a registered investment advisor. An advisor will be able to answer your questions and help you invest in line with your retirement savings goals. Our comprehensive Investor Guide can help you work effectively with a registered investment advisor.
Visit the CRA website for additional resources and to learn more about RRSPs.
This resource from the Financial Consumer Agency of Canada will help you think of different retirement income sources when planning for retirement.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.