Registered retirement savings plan (RRSP)
The foundation of your retirement
An RRSP provides short and long-term tax advantages that can help fund the retirement you want.
Pay less tax now
Contributing to an RRSP lowers your taxable income so you pay less income tax while saving for your retirement.
Keep more of your investments
You don’t pay tax on the growth of your investments in your RRSP until you withdraw it so you can keep more of your money.
Help buy a first home or go to school
Use money from your RRSP to help buy your first home or fund you or your spouse’s education.
What is an RRSP?
It’s an investing and retirement savings account registered with the Canada Revenue Agency (CRA) that provides Canadians benefits to save for retirement. The money you put towards an RRSP isn’t taxed as a part of your income, so you pay less income tax.
It’s different from a typical savings account as it’s a place to put your investments where any growth isn’t taxed until you take your money out. Usually you’ll be retired by the time you withdraw your money, so you’ll generally pay less tax than in your higher earning years and get to keep more of your money for retirement.
What is your RRSP contribution limit?
Generally, your contribution limit is calculated by the Canada Revenue Agency based on these 3 factors:
- Total of your unused deduction room from the previous year
- Now add the smaller amount of:
- 18% of the earned income you reported on your tax return last year
- $26,500 (the annual limit for 2019)
- Then subtract any pension adjustment from the previous year (if applicable)
What happens if you go over your RRSP limit?
You will be taxed 1% per month on any amount that is more than $2,000 over your contribution limit. If you don’t pay the additional tax within 90 days after the calendar year, you’ll face late-filing penalties or interest charged.
What are the tax advantages?
An RRSP provides tax advantages up front and in the future.
Up front advantages
It’s almost like paying yourself twice – at the same time as you’re saving, you’ll also reduce the income you’ll pay tax on. Let’s say you earn an $80,000 salary per year and you decide to contribute your allowed maximum into your RRSP—$14,400. When it’s time to pay your taxes, the CRA will only tax you on $65,600 of income.
Any growth on the investments in your RRSP is sheltered from tax until you make a withdrawal, which is usually in retirement when you’re in a lower tax bracket.
What are the RRSP contribution rules?
There are 2 general RRSP contribution rules:
You can contribute until Dec. 31 of the year you turn 71 years old
You can contribute what you have available in your contribution room provided by the CRA
What is the RRSP contribution deadline?
March 1, 2021 is the last day to contribute to you or your spouse’s RRSP to claim a deduction on your 2020 tax return.
Can you withdraw from your RRSP before you retire?
You can withdraw from your RRSP at any time but there are 3 main considerations:
Set your saving goals back
You’ll lose the benefits of your earnings compounding which can have a large impact over time.
Pay tax now
There’s an upfront withholding tax and the withdrawal amount is added to your taxable income in that year.
Lose your contribution room
You permanently lose the contribution room for the amount you take out.
Times you may want to withdraw
You can withdraw funds from your RRSP tax-free to buy your first home or help fund you or your spouse’s education, within certain limits.
$35,000 for your first home
You can withdraw money from your RRSP to buy or build your first home as part of the Home Buyers’ Plan. You must re-contribute the amount that was taken out for the down payment over a 15-year period or you will be taxed on it. The 15-year repayment period begins 2 years after the calendar year in which you make the withdrawal.
$20,000 for your education
You can use a maximum amount of $20,000 to finance you or your spouse or common-law partner’s education through the Lifelong Learning Plan. You can only withdraw $10,000 per year. You must re-contribute the withdrawn amount over a period of several years or you will be taxed on it.
Do you need a TFSA or an RRSP?
At the end of the day a TFSA and an RRSP both help you do the same thing – allow you to save money for the future. But they do it in different ways, so depending on your circumstances, having both can help you achieve your goals.
How do you start one?
|You earned an income and filed your income taxes for the previous year||Automatically if you’re 18 or older, have a valid social insurance number and are a Canadian resident|
How long can you contribute?
Dec. 31 of the year you turn 71
What’s the contribution deadline?
|March 1, 2021 to claim a deduction for the previous year||Not applicable as contributions aren’t deductible|
What’s the contribution limit?
|The smaller amount of 18% of your earned income last year or 2020’s annual limit of $27,230 plus any unused carry-forward contribution room, less any pension adjustments|
$6,000 for 2020, plus any withdrawals in a previous year and any unused contribution room carried forward from the previous year
What happens if you withdraw money?
Contribution room is permanently lost
|Never lose contribution room. It’s re-added on Jan. 1 of the following year|
What are the upfront tax advantages?
Lower your taxable income for the current year
None because contributions are made with after-tax income
What are the future tax advantages?
Any income earned in your RRSP is usually free from tax as long as it stays in the plan.
Every dollar you withdraw is taxed at your marginal tax rate, which is usually lower when you’re retired.
You generally won’t pay tax on any income earned in the account or the money you withdraw.
There aren’t any tax consequences if you need to use your savings for emergencies or short-term expenses.
Withdrawals aren’t considered income, so this money isn’t included when the government calculates benefits like Old Age Security, Guaranteed Income Supplements, GST/HST credits and other credits/benefits like the Age Credit.
|Can provide greater short and long-term tax benefits but is less flexible because you have to pay income taxes on withdrawals||Doesn’t offer as many tax benefits, but is much more flexible because there are no tax consequences for withdrawals|