RRSP Basics: What Every Canadian Should Know

Basics, Background, and Benefits

The Registered Retirement Savings Plan (RRSP) is a registered account designed to help Canadians save for retirement. For many Canadians, an RRSP is a powerful long-term savings tool. By combining potential tax savings today with tax-deferred growth over time, RRSPs can help investors build wealth and create a source of income for retirement. Your RRSP must be converted to a Registered Retirement Income Fund (RRIF) by the end of the year in which you turn 71, and you are required to start making minimum withdrawals during the year in which you turn 72.

There are several opportunities available with RRSPs beyond just saving for retirement, including the Home Buyers’ Plan (HBP), Lifelong Learning Plan (LLP), and using spousal RRSPs. A spousal RRSP is an effective income-splitting strategy for couples to take advantage of. Here, a higher-earning spouse can contribute to an RRSP in their partner’s name. The higher-earning spouse will receive the tax deduction, while future withdrawals are taxed in the lower-earning spouse’s hands.

There are applicable rules with spousal RRSPs as well, mainly the three-year attribution rule, meaning that if funds are withdrawn from a spousal RRSP in the year a contribution is made or within the following two calendar years, the withdrawal may be taxed back to the contributing spouse rather than the account owner. It is important to plan ahead before contributing to a spousal RRSP so that you can avoid unintended tax consequences.

Who Can Open an RRSP?

Canadian residents who are 19 and over (18 in some provinces) with a valid SIN, who have earned income and filed a Canadian tax return are eligible to open an RRSP account.

Non-residents can also contribute to an RRSP if they have contribution room from earned income in Canada prior to leaving the country, but it is important to seek professional advice before proceeding.

Contributions and Withdrawals

Your RRSP contribution room is based on your earned income. Each year, your RRSP contribution room is equal to 18% of your earned income from the previous year, up to an annual maximum set each year by the CRA. Similar to a TFSA, unused contribution room can be carried forward to future years, providing flexibility in your financial planning. An advantage of the RRSP is the flexibility of claiming deductions. While contributions must be made within your available contribution room, you do not have to claim the associated tax deduction in the same year. Sometimes, it may be beneficial to carry a deduction forward and use it in a future year when your tax rate is higher. RRSP contributions made within the first 60 days of the next calendar year can be deducted on the previous year’s return.

One of the primary advantages of an RRSP is that contributions can be used to reduce your taxable income. On the other hand, withdrawals are taxable and are added to your income in the year they are received, and do not create new contribution room. These taxable withdrawals can affect benefits like OAS or GIS in retirement. The RRSP Home Buyers’ Plan (HBP) allows eligible first-time home buyers to withdraw funds from their RRSP to purchase or build a qualifying home. By making an eligible withdrawal through HBP, funds can be accessed tax-free, provided they are repaid to the RRSP over the defined period.

The Lifelong Learning Plan (LLP) allows individuals to withdraw RRSP funds tax-free to help finance full-time education or training for themselves or their spouse. There is a repayment requirement for funds withdrawn via LLP.

An RRSP feature that Canadians should be aware of is that participation in a workplace pension plan may reduce the amount of new RRSP contribution room earned each year through a pension adjustment. Overcontributions to an RRSP are subject to a 1% per month penalty tax on the excess amount, but there is a $2,000 lifetime buffer above your contribution room where no penalty applies.

What Can You Hold in an RRSP?

You can hold a wide range of investments in an RRSP account:

• Cash
• Mutual funds
• Exchange-traded funds
• Bonds
• GICs
• Stocks
• Certain other permitted investments

The investments held within your RRSP should reflect your financial goals, time horizon, and risk tolerance. Please contact us if you would like to discuss how to make the most of your RRSP and ensure it aligns with your overall financial plan.