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RRSPs

These accounts help you save for retirement.

A Registered Retirement Savings Plan (RRSP) is an account registered with the Canada Revenue Agency (CRA) that helps Canadians save for their retirement.

  • It allows you to deduct eligible contributions from your taxable income, lowering your current income tax.
  • It defers taxation of account investment earnings until you withdraw funds in your retirement years, when your income is typically lower.

Opening an RRSP

You can open two main types of RRSP accounts:

  • Individual RRSPs: Contributions towards your own retirement savings.
  • Spousal RRSPs: Contributions towards your spouse’s retirement savings. This could lower your combined income tax after retirement by converging your retirement incomes.

Some employers offer Group RRSPs as a benefit. Some employers make additional contributions on behalf of employees enrolled in their Group RRSP. Check with your employer to see if this option is available.

When opening an RRSP:

  • Understand what types of investments you can purchase through the account (e.g. mutual funds, ETFs, stocks, bonds).
  • Understand if you will have access to other companies’ investment products or only to investment products sold by the company that created your account.
  • Compare fees and charges related to the investments you purchase in your account. Examples of fees to consider include trading fees, advisory fees, withdrawal fees, account transfer fees, administration fees, and foreign exchange fees.
  • If you do not feel confident investing on your own, or if you do not have time to properly research potential investments, then consider working with a registered investment advisor to align your investments with your financial goals.
  • If you feel confident investing on your own and are willing to put in the time to properly research potential investments, then consider a self-directed RRSP. Self-directed accounts may provide access to a broader range of potential investments and at lower cost.

Contributions to an RRSP must be made before the annual deadline — 60 days after the end of the calendar year (e.g. March 1, or February 29 in leap years). Your contribution limit is determined by your prior year income and by any pension adjustments calculated by your employer. Check your CRA account or your income tax assessment for the previous tax year for your specific RRSP deduction limit.

Withdrawals are taxable that year and do not re-open RRSP contribution room. However, borrowing from your RRSP to go to school or purchase a home allows for penalty-free withdrawals under specific conditions, as long as you repay the funds within the prescribed timelines. 

By December 31 of the year you turn 71, you must close your RRSP. You can:

  • Convert it into a Registered Retirement Income Fund (RRIF). With a RRIF, you choose how to invest the funds, and can withdraw funds at your discretion, subject to minimum withdrawal requirements. The value of your RRIF will go up and down to reflect market changes in the investments.
  • Use the funds to buy an annuity. An annuity is an insurance policy that pays a guaranteed amount of income.
  • Withdraw the balance in cash, which will be taxed as income that year. 

Advantages of an RRSP

RRSPs offer key benefits, including:

  • Tax deductions: Contributions to an RRSP can be deducted from your taxable income, which may reduce the amount of tax you owe.
  • Tax-deferred growth: Investment earnings (such as interest, dividends, or capital gains) grow tax-free within the account, allowing your savings to compound more quickly.
  • Income smoothing: By deferring taxes to retirement when your income may be lower, you can potentially pay less in taxes overall.
  • Retirement security: RRSPs encourage disciplined, long-term saving to ensure financial stability in your retirement years.
  • Spousal contributions: Contributions to a spousal RRSP can help couples split income in retirement, reducing overall tax burdens.
  • Special programs: RRSPs allow you to participate in programs like the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP), enabling you to use your RRSP savings for a home purchase or education without immediate tax consequences.

Disadvantages of an RRSP

While RRSPs offer significant advantages, they also come with some drawbacks to consider:

  • Taxable withdrawals: All withdrawals, including those in retirement, are taxed as income (i.e. at higher marginal tax rates than capital gains or dividend income). Also, if your retirement income is higher than expected, and/or if tax rates go up before you retire, your lifetime tax savings may be lower than expected.
  • Limited access to your savings: RRSPs are designed for long-term (e.g. retirement) savings. Accessing funds early may significantly reduce or eliminate the tax deferral benefits of using an RRSP. RRSPs are not intended for short-term savings needs.

When is it Optimal to Use an RRSP?

  • If you don’t expect to receive a workplace pension: The RRSP was created to help Canadian employees, who don’t have a workplace pension, save for retirement.
  • Early in your career: Starting contributions early maximizes the power of compounding growth. Even small amounts invested regularly can grow substantially over decades.
  • Before major purchases: If you’re planning to buy a first home or pursue education, the HBP and LLP programs can help you access funds without penalty.
  • To support your partner: Consider spousal RRSPs to split income and optimize your tax strategy during retirement.

Questions About RRSPs

For more information, consult your registered investment advisor or visit the CRA website.

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