Registered Retirement Savings Plans (RRSPs): How They Work
A registered retirement savings plan (RRSP) is a government-registered retirement savings account available to Canadians until the age of 71.
What is an RRSP?
An RRSP is a savings account that can reduce your tax burden in a few ways:
Contributions can be deducted from your annual income.
Income earned on your RRSP savings or investments is exempt from taxes until withdrawal.
The RRSP is a popular retirement savings account in Canada. In 2022, the last reported year, 21.7% of tax filers made RRSP contributions.
Types of RRSPs
You can choose from a variety of RRSP options that best suit your financial situation.
Individual RRSP: an account registered in your name. You make contributions to it and reap the associated tax benefits.
Spousal RRSP: an account opened in your spouse’s name, where you contribute and claim tax deduction. A spousal RRSP allows you to split your retirement income with your partner.
Group RRSP: a pooled plan offered by your employer. Your contributions are typically deducted from your paycheck and managed through the employer’s financial institution.
How does an RRSP work?
Individuals who open an RRSP can make annual contributions up to a limit. RRSPs are tax-deferred accounts, which means interest or investment income earned within them is not taxed until withdrawal.
Here’s what you need to know about the RRSP contributions and withdrawals:
When deciding how much money to divert to your RRSP, keep these rules in mind.
Contribution limit. You can contribute up to a certain amount each year, called your RRSP contribution limit. This limit is 18% of your previous year’s earned income, up to a fixed maximum set by the CRA, which changes annually. You can also use any unused contribution room carried forward from previous years.
Over-contribution penalty. If you exceed your RRSP contribution limit by over $2,000, you'll face a penalty. The penalty is typically 1% of the excess contribution per month.
You may withdraw funds from your RRSP at any time. Your withdrawals are subject to tax penalties.
Withholding tax. Your financial institution withholds a percentage of the amount. The amount ranges from 10% to 30% and depends on your location and the amount you withdraw.
Additional tax. Keep in mind that the tax withheld may not be enough to cover your tax bracket. You may end up having to pay additional tax when you file your return.
However, the Home Buyer’s Plan and Lifelong Learning Plan programs are notable exceptions. These plans allow tax-free withdrawals, up to a set amount, for buying your first home and funding education. These withdrawals count as zero-interest loans that must be repaid.
RRSP withdrawals have two significant drawbacks. Once you have withdrawn money from your RRSP, you lose:
The contribution room, and
The potential tax-deferred compound interest and investment gains on the full amount.
At maturity, which is the December 31 of the year in which you turn 71, you must choose from the following
Withdraw funds from your RRSP.
Convert funds into a registered retirement income fund (RRIF).
Purchase an annuity.
As long as your account is not a locked-in RRSP (also called a locked-in retirement account (LIRA), in some provinces) you can withdraw funds as your retirement income at any time. Note that applicable tax rules will apply to these withdrawals.
Find the right RRSP for your needs
Compare our top picks for the best high-interest RRSPs in Canada
RRSP pros and cons
An RRSP may be appealing to anyone who wants to start saving for retirement or to save for a new home while taking advantage of the tax deferral it provides.
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.
» MORE: How an RRSP compares to an Tax-Free Savings Account (TFSA)
How to open an RRSP
Enrolling in a group RRSP is straightforward. You simply follow the set instructions provided by your employer’s financial institution.
Setting up an individual or spousal RRSP is similar to opening a bank account. Based on your banking preference, you might choose a traditional brick-and-mortar bank, an online bank, a credit union, a trust or an insurance company.
To open an RRSP, you’ll need to complete 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 to:
Be a Canadian resident below the age of 71.
Provide a piece of government-issued ID.
Have a social insurance number (SIN).
Have earned an income and filed a tax return in Canada.
There’s no minimum age requirement. A parent or legal guardian can help a minor open an RRSP account if they have Canadian employment income and file tax return.
You can deposit funds into your RRSP in two ways:
Contribute annually with a lump-sum deposit.
Set up automatic contributions or pre-authorized debits throughout the year.
RRSP investment options
If you’re new to investing or have a busy schedule, you may consider working with an advisor at a financial institution who can manage your RRSP investments.
Alternatively, you might opt for a self-directed RRSP through an online brokerage firm. You might choose this if you have the time and expertise, or you can use a robo-advisor for investment guidance.
Depending on the kind of RRSP you sign up for, you can hold variety of investment options. These include:
Guaranteed RRSPs. Guaranteed investment certificates (GICs) held within an RRSP earn interest and are one of the safest options, though the returns are typically low.
Mutual fund RRSPs. RRSP-eligible mutual funds are usually managed by your bank’s financial advisor but often come with higher management fees.
Savings account RRSPs. A regular or high-interest savings account structured as an RRSP is usually safe but often yields lower returns compared to other methods.
Alternatively, you can see how an RSP compares to an RRSP and find the best option to support your investment goals.
Frequently asked questions
Can you lose money in an RRSP?
Can you lose money in an RRSP?
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.
What happens to my RRSP when I die?
What happens to my RRSP when I die?
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.
Is my RRSP protected?
Is my RRSP protected?
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.
DIVE EVEN DEEPER
Siddhi Bagwe
Siddhi Bagwe