Registered retirement savings plan (RRSP)
An RRSP is a powerful savings vehicle
A registered retirement savings plan (RRSP) is a personal savings and investment account that has special tax advantages. RRSPs can hold a variety of qualifying investments including savings deposits, treasury bills, guaranteed investment certificates (GICs), mutual funds, bonds, and equities.
What makes an RRSP such a powerful savings vehicle is that your contributions are tax deductible and any investment growth is tax-sheltered. Tax deductible contributions mean you’ll have more of your income available for your current needs, even while you’re saving for the future. And tax sheltered investment growth (interest, dividends, capital gains) keeps more of your money working for you.
Of course, when you make an RRSP withdrawal, the money you take out is taxed at your then-current tax rate. But, if you’re like most people, you’ll be retired when you start to make RRSP withdrawals, your tax rate will likely be much lower than when you were employed, and you’ll be able to keep more of your hard-earned money.
Making an RRSP contribution
As long as you have unused RRSP contribution room or earned income in the previous year while a Canadian resident, you can make an RRSP contribution.
- How much can I contribute to an RRSP?
You are allowed to contribute up to 18% of your previous year’s earned income to the maximum amount set by the Income Tax Act and Regulations. The Notice of Assessment that the Canada Revenue Agency (CRA) sends to you each year after processing your tax return shows your RRSP contribution limit, including any unused contribution room from previous years.
- When can I make an RRSP contribution?
If you have contribution room, you can contribute at any time – either in a lump sum or by making periodic contributions throughout the year. You can make RRSP contributions until the end of the year you turn age 71.
Most financial experts agree, however, that the key to a healthy RRSP is to start early and establish a regular savings schedule. The longer your RRSP contributions are invested, the longer they will have to grow. And investing smaller amounts regularly reduces the stress of coming up with a lump sum, or worrying about what the markets are doing when you put a lump sum in your RRSP.
- What if I can’t contribute the full amount allowed?
You’re allowed to carry forward any unused contribution room indefinitely. It simply gets added to your RRSP contribution limit and you can use it at any time before the end of the year you turn age 71. Depending on your personal financial circumstances and goals, you may want to look at the options for taking full advantage of your contribution room sooner than later. One such option is borrowing to contribute to your RRSP and then using your income tax refund to reduce the loan.
Try the RRSP loan calculator to see how this strategy might be right for you.
Making an RRSP withdrawal
You can withdraw money from your RRSP at any time. The amount you withdraw is included in your taxable income for that year and is taxed at your marginal tax rate. See the impact withdrawals can have on your RRSP savings with the RRSP contributions and withdrawals calculator.
Please note that if you’re making an RRSP withdrawal to buy a house or to further your or your spouse’s education, different rules apply. Speak to your advisor or see the CRA website for more details.
- How long can I have an RRSP?
You must close your RRSP (i.e. withdraw all the money from it) by the end of the year in which you turn 71. If you choose, you may close it any time before that.
- What are my options when I close my RRSP?
You have three options: 1) take the money in cash, 2) buy an annuity or 3) transfer the money to a Registered Retirement Income Fund (RRIF).
Cash – could be a costly option, depending on your marginal tax rate, as all the money will be taxed in the year you withdraw it.
An annuity – provides a guaranteed income for life or until age 90 – and the annuity income will only be taxed when you receive it. Learn more about payout annuities.
A RRIF – your money stays invested and the growth remains tax-deferred. Every year you must withdraw a minimum amount from your RRIF. Unlike an annuity, a RRIF does not guarantee income for life. At any time, however, you can use the money in a RRIF to purchase an annuity.
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