What is an RRSP?
A registered retirement savings plan (RRSP) is a personal savings account that has special tax advantages. RRSPs can be held in a variety of qualifying investments, including treasury bills, guaranteed interest products, mutual funds, segregated fund contracts, bonds and equities.
What makes an RRSP such a powerful savings vehicle is that your contributions are tax deductible and the taxes on any investment growth are deferred until you take your money out. 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-deferred investment growth (interest, dividends, capital gains) keeps more of your money working for you.
When you withdraw money from your RRSP, it is taxed at your tax rate at the time you take it out. But, if you're like most people, you'll be retired when you start to make withdrawals, your tax rate will likely be lower than when you were employed, and you'll be able to keep more of your hard-earned money.
You should consider an RRSP if:
- You want to save money for retirement and be able to deduct your contributions from this year's income
- You're looking to reinvest your tax savings
- You want to use your tax savings to pay down non-tax-deductible debt, like your mortgage
Making an RRSP contribution
As long as you are a Canadian resident with earned income in the previous year and unused contribution room, you can make an RRSP contribution.
You are allowed to contribute up to 18% of your previous year's earned income to the maximum amount set each year 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.
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.
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.
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 rather than later. One such option is borrowing to contribute to your RRSP and then using your income tax refund to repay 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, but once withdrawn, that contribution room may not be regained. The amount you withdraw is included in your taxable income for that year and is taxed at your marginal tax rate. You can see the impact withdrawals have on your RRSP savings with the RRSP contributions and withdrawals calculator.
You must close your RRSP (i.e., transfer 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.
You have 3 options:
- Take the money in cash
- Buy an annuity
- 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 allows you to keep your money invested and growing, tax-deferred. Every year you must withdraw a minimum amount from your RRIF. Any amount taken above the legislated minimum amount will be taxed.
Make a Sun Life Financial RRSP a key part of your retirement plan
Starting and building an RRSP is an important step in securing your financial future – and professional guidance can be a valuable part of your decision-making. An advisor understands how RRSPs work and can show you how to structure your contributions and how to choose your investments to make the most of the benefits offered by this powerful savings vehicle.
Talk to your advisor or find an advisor near you to learn how RRSPs fit into Money for Life, Sun Life Financial's customized approach to your financial and retirement planning.