What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a special account that helps you save for retirement with added tax benefits. Anyone with earned income can open an RRSp account and contribute to it.
You can open an RRSP at:
- Banks and trust companies
- Credit unions and caisses populaires
- Mutual fund companies
- Investment firms (for self-directed RRSPs)
- Life insurance companies
As long as you have earned income and file a tax return, you can open RRSP at any age.
You must close your RRSP when you turn 71.
How much can you contribute?
There are limits on how much you can contribute to your RRSP each year.
You can contribute the lower of:
The total amount you can contribute to your RRSP each year consists of your contribution limit for the current year plus any “carry-forward” contribution room from previous years.
Your RRSP contribution limit for 2024 is 18% of earned income you reported on your tax return in the previous year, up to a maximum of $31,560 plus any carry-forward amount from previous years. For 2023, the dollar limit was $30,780. For 2025, the dollar limit will be $32,490.
If you don’t make the maximum allowable RRSP contribution in any given year, Canada Revenue Agency (CRA) lets you carry forward the unused contribution room indefinitely and add this to the amount you can contribute for future years.
You can check your RRSP contribution room in your CRA Account and on your Notice of Assessment. You receive the Notice of Assessment after you file your tax return, generally around the month of May. The Notice of Assessment also shows any carry-forward contribution room from previous years.
If you have a company pension plan, your RRSP contribution limit is reduced. Your employer calculates the pension adjustments and reports it to the CRA on your T4 each year. If you contribute to registered pension plan (RPP) or defined profit sharing plan (DPSP), your pension adjustment is the total contributions to the plan made by you and your employer. For your RPP, your pension adjustment is based on a formula that reflects the pension benefits you accrued during the year.
What Can You Hold in Your RRSP?
The eligible investments for RRSP accounts include:
- Cash
- Gold (but only certain coins, bullion and bars that meet purity standards specified by the Canada Revenue Agency)
- GICs
- Bonds
- Mutual Funds
- ETFs
Investments that you cannot hold in RRSPs include:
- Certain Precious Metals (only gold, silver, platinum and palladium of certain kind are allowed)
- Commodity Futures Contracts
- Real Estate (certain Real Estate Investment Trusts (REITs) are permitted)
- Shares of Private Corporations (unless they meet certain conditions)
- Other investments (especially shares of a corporations in which the RRSP holder owns a significant interest)
What are the different types of RRSPs?
There are three primary types of Registered Retirement Savings Plans (RRSPs). While the individual RRSP is the most widely used, you might also find the spousal or group RRSP options attractive.
Individual RRSP
An individual RRSP is an account registered under your name, where both the investments and the associated tax benefits are yours. You have the option to independently manage your investment portfolio through a self-directed RRSP or collaborate with a financial advisor.
Spousal RRSP
A spousal RRSP is registered in the name of your spouse or common-law partner. Although they own the investments, you are responsible for making contributions. You receive a tax deduction for your contributions to the spousal RRSP, which will lower your RRSP deduction limit for that year, but it won’t impact your spouse’s contribution limits.
Utilizing a spousal RRSP can help you and your spouse distribute income more evenly during retirement, potentially lowering your combined tax liability compared to having all assets in one RRSP. This strategy is particularly beneficial if you earn significantly more than your spouse and anticipate being in a higher tax bracket upon retirement, or if you have a pension plan that your partner does not.
To qualify for a spousal RRSP, you must:
- Have lived together for at least 12 months,
- Have a child together through birth or adoption, or
- Share custody and support for your partner’s children from a previous relationship.
If your spouse withdraws funds you contributed to the spousal RRSP:
- Within three years of making the contribution – you will have to pay tax on the withdrawal.
- Three years or more after the contribution – your spouse will be liable for the tax on the withdrawal.
In the event of a separation:
- If married, assets are typically divided equally.
- For common-law partners, it’s advisable to create a joint agreement regarding asset division, as it may not be mandatory to divide them equally.
Spousal RRSPs are effective for balancing retirement income and reducing tax liabilities. They may not be necessary if you and your spouse will have similar incomes during retirement.
Group RRSP
Some employers provide group RRSPs as a benefit to assist employees in saving for retirement. With a group RRSP, you open an individual account but contribute through your employer, with all employee RRSPs managed at the same financial institution. Here’s how it operates:
- Your employer automatically deducts contributions from your salary, and s/he may match or supplement your contributions.
- Employers often cover the costs associated with setting up and managing the plan, while you are responsible for investment fees.
- The selection of investment choices may be limited, depending on the provider of the group RRSP.
- The rules governing when and how much money you can withdraw depend on your employer.
It is crucial to understand the specific functioning of your group RRSP, as the regulations and options may differ based on your employer and the plan’s provider.
A Self-Directed RRSP Account
A self-directed RRSP lets you take an active role in selecting and managing investments in either an individual or spousal RRSP. Both full-service and discount brokerage firms offer these plans, allowing you to hold various investment types in one plan for easier tracking and asset management.
This type of RRSP may be right for you if you:
- Seek a wide range of investment options.
- Are knowledgeable about investing.
- Have the time to manage your portfolio.
Be aware of potential fees for opening and maintaining your self-directed RRSP, such as setup and annual trustee fees, and commissions for buying and selling investments. Although discount brokerages may have lower commissions, it is always best to do some research before investing your money so that you can be confident in making your own investment decisions.
Other Uses of RRSPs:
An RRSP is an effective way to save for retirement while reducing your income tax burden. In addition to retirement savings, there are other beneficial uses for your RRSP, such as:
- RRSP Home Buyers’ Plan: This program allows you to withdraw funds from your RRSP to help with the purchase of your first home.
- Lifelong Learning Plan: This plan lets you withdraw money from your RRSP to fund your education or that of your spouse, helping you pursue lifelong learning opportunities.
Benefits of RRSPs
Using an RRSP for retirement savings offers several advantages over a regular savings account:
- Tax Deductible Contributions: RRSP contributions lower your taxable income, potentially resulting in a smaller tax bill or a larger refund, providing immediate tax relief while using pre-tax dollars.
- Tax-Free Growth: Your savings can grow tax-free while in the RRSP, meaning the government doesn’t tax you on interest and investment earnings.
- Tax Deferral: You only pay taxes on your contributions and earnings when you withdraw from the plan, often at a lower tax rate in retirement compared to your working years.
- Regular Payments in Retirement: You can convert your RRSP into a Registered Retirement Income Fund (RRIF) or an annuity tax-free at retirement, with lower taxes on withdrawals if you are in a lower tax bracket.
- Spousal RRSP Benefits: Contributing to a spousal RRSP can help balance retirement income and reduce your combined tax burden, especially if one spouse earns significantly more.
- Borrowing for Home or Education: You can withdraw up to $35,000 for a first home (Home Buyers’ Plan) or $20,000 for education (Lifelong Learning Plan) without immediate tax, as long as you repay the amounts within specified timeframes.
