Putting money away in a registered retirement savings plan (RRSP) can be about more than just getting a tax break and building your nest egg. There are several RRSP benefits to know so you can get more out of your plan now and after retirement.
» Start with the basics: What is an RRSP?
1. RRSP contributions reduce your taxable income
The first advantage of putting money into your RRSP is that each contribution reduces your net taxable income.
Money held within an RRSP — both the amount you contribute and any gains your investments realize — is also sheltered from tax until you withdraw. If you take your RRSP funds out when you retire, it’s likely you’ll be in a lower tax bracket and will have to pay less tax.
Make sure to contribute at the right time. Each year, the CRA gives you an additional 60 days to contribute to your RRSP so that it counts towards the previous tax year. This year, the 2021 RRSP deadline was March 1, 2022.
» Don’t miss your chance: How to prepare for the RRSP contribution deadline
2. Unused RRSP contributions roll over
If you cannot max out your RRSP contribution room, that amount doesn’t disappear. The contribution room will roll over to the next calendar year, allowing you to take advantage of the unused room by making a larger contribution in another tax year.
To find out if you have unused contribution room, check your Notice of Assessment from last year’s tax return, or log into the CRA My Account website.
3. RRSP investments can earn compound interest
Starting to contribute to your RRSP regularly — via a lump sum or regular contributions — will also allow you to benefit from compounding interest. Because your initial investments and interest payments remain within the plan and are reinvested, your rate of return is applied to a growing balance, allowing your investment to grow faster over time.
The earlier you start putting money into your RRSP, the longer your contributions — and the interest they earn — have the opportunity to compound, growing on a tax-deferred basis until you withdraw the funds in retirement.
4. Your savings are protected from creditors
If you declare bankruptcy, the federal government protects the money in RRSPs, registered retirement income funds (RRIFs), registered disability savings plans (RDSPs), and deferred profit-sharing plans (DPSPs) from creditors. However, any contribution made within a year of declaring bankruptcy is not protected.
Assets in RRSPs and RRIFs are also protected from creditors in general (even outside of bankruptcy) in certain provinces: British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island (P.E.I.), and Newfoundland and Labrador.
Eligible deposits, such as guaranteed investment certificates (GICs) and term deposits, also qualify for Canada Deposit Insurance Corporation (CDIC) coverage, up to $100,000.
5. There are many RRSP investment options
The RRSP is an envelope in which you can hold various investment products — from stocks to mutual funds or bonds. Being strategic about what you keep can be helpful because any dividends, capital gains and interest generated in the account are sheltered from tax.
For example, if you choose to hold interest-bearing investments within an RRSP, such as GICs or bonds, any income generated will not be taxed when earned. You’ll only have to pay taxes when you withdraw the money, which will likely be when you retire and are in a lower tax bracket.
6. You can choose a self-directed or managed investing strategy
You can tailor your RRSP strategy based on what you want to hold within the RRSP, how much time you want to dedicate to managing it, and your comfort level with investing.
For example, an investment manager or a robo-advisor will actively manage a mutual fund or pre-built RRSP portfolio. If you choose this option, you’ll likely have a limited selection of investment products will have to pay management fees. If you opt for a self-directed RRSP, often through an online brokerage, you’ll have to choose your own investments, but you will have access to more types of holdings and will likely pay lower fees.
7. You can withdraw early to buy a house or go back to school
If you’ve saved in an RRSP for a few years, but you have plans to buy a house or go back to school, the federal government offers Canadians two programs that allow for early (pre-retirement) withdrawals from an RRSP on a tax-free basis. The amounts have to be paid back within a specific timeframe.
The Home Buyers’ Plan lets first-time homebuyers withdraw up to $35,000 from their plan. The funds must be paid back within 15 years, with payments starting the second year after taking out the money.
The Lifelong Learning Plan allows full-time students to withdraw $10,000 per year, up to a maximum of $20,000, to be repaid within 10 years.
» Just because you can doesn’t mean you should: What you should know about RRSP withdrawals
8. RRSP deductions are deferrable
You don’t always have to claim RRSP contributions in the same year they’re made. Depending on your circumstances, it could make sense to hold off.
For example, if you’re expecting to earn a higher income (and have a higher marginal tax rate) in the future, it might be strategic to wait to claim an amount in a future tax year where it will have more impact. Just be sure that you have the contribution room to do so.
» See our picks: The best high-interest RRSPs in Canada
9. You can convert your RRSP to a RRIF or annuity
Your RRSP reaches maturity on December 31 of the year you turn 71. At this point, you’re required to withdraw the funds for retirement. You can either:
- Take a lump-sum payment, which will be subject to withholding tax and added to your income for the year.
- Convert your RRSP to a RRIF, which requires you to make annual minimum withdrawals that are included in your taxable income each year but are not subject to withholding tax.
- Purchase an annuity, which offers a guaranteed income for life or a specified period, not subject to withholding tax, but you may have to pay tax on the income.
10. Spousal RRSPs split shared income
For couples where one spouse earns a high income than the other, a spousal RRSP allows the partner with the higher income to contribute to an RRSP in their spouse’s name and receive the tax deduction themselves. These plans also offer tax advantages to families during retirement by letting spouses split income more evenly.
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