Investments

RRSP — Registered Retirement Savings Plan

The money you earn while working has to last after you stop. A common planning figure is that you will need something like 70% of your pre-retirement income to keep the same lifestyle, and an RRSP is the main tool Canada gives you to get there.

How It Works

Three things an RRSP does

It reduces the tax you pay now

Contributions are deductible against your income for the year. Put money in and your taxable income falls by the same amount, which is why an RRSP contribution often produces a refund. The higher your marginal rate, the more that deduction is worth — which is the argument for using an RRSP more heavily as your income rises.

Your annual room is a percentage of the previous year’s earned income up to a ceiling set by the CRA, plus anything you have not used from earlier years. The exact figure is personal to you and appears on your notice of assessment.

It shelters growth

Income earned inside the plan — interest, dividends, capital gains — is not taxed while it stays there. Over a working life that compounding, untouched by annual tax, is where most of the eventual balance comes from.

It defers, rather than avoids, tax

You pay tax when you take money out. The bet is a simple one: you contribute while your income and tax rate are high, and withdraw in retirement when they are lower. If that holds, you keep the difference. If your retirement income will be higher than your working income, an RRSP may not be the right first choice.

Beyond Retirement

Two ways to use it early

The Home Buyers\’ Plan

A first-time buyer can withdraw from an RRSP toward a home purchase without the withdrawal being taxed, provided it is repaid to the plan over a set schedule. Miss a repayment and that year’s amount is added to your income instead. With the FHSA now available, it is worth comparing the two — and they can be used together. See FHSAs.

The Lifelong Learning Plan

The same idea for full-time education or training for you or a spouse: withdraw, then repay over a set period. Useful for a career change funded from savings you already hold.

Spousal RRSPs

If one partner earns considerably more, the higher earner can contribute to a plan owned by the lower earner and claim the deduction themselves. In retirement the withdrawals belong to the lower-income spouse and are taxed in their hands. Splitting retirement income across two people, rather than concentrating it in one, usually means less tax overall.

Borrowing to contribute is common, and it is not automatically sensible. Lenders offer RRSP loans at low rates because the refund can repay much of the loan. That works when the refund is genuinely reinvested and the loan is cleared quickly. It works badly when the refund is spent and the debt lingers. Run the numbers before, not after.

No obligation

Is an RRSP the right first move?

For some people it plainly is. For others — early career, lower tax bracket, saving for a first home — a TFSA or FHSA does more good first. Tell an advisor your situation and you will get a straight answer, including when the answer is to wait.

Talk to an advisor

RRSP questions

Your room is a percentage of the previous year’s earned income up to an annual ceiling, plus unused room carried forward from earlier years, less any pension adjustment. It is personal to you and shown on your notice of assessment and CRA My Account — do not rely on a general figure.

Contributions made in the first 60 days of a year can be claimed against the previous tax year. That is why RRSP advertising appears every winter.

Yes, but the amount is added to your income for that year and tax is withheld at source, so it is usually an expensive way to raise money. The Home Buyers’ Plan and Lifelong Learning Plan are the two exceptions that avoid the immediate tax hit.

It has to be converted by the end of the year you turn 71 — normally into a RRIF, which pays you a minimum amount each year, or into an annuity. You do not lose the shelter; you start drawing on it.

Naming a spouse or common-law partner as beneficiary generally allows a tax-deferred rollover into their plan. Without that, the balance is usually treated as income in the year of death, which can produce a large tax bill against the estate — a good reason to check the beneficiary designation is current.

Planning for retirement?

Call 437-428-2828 and talk it through with a licensed advisor. Mon–Sat, 9am–8pm ET. No obligation, and nobody will push you to buy on the call.

Call 437-428-2828