Everything You Need to Know About RRSPs and Your Tax Return

What is an RRSP?

Let’s start with a crash history lesson: the Registered Retirement Savings Plan (RRSP) was started back in 1957 as a way for Canadians to save for retirement. More than 65 years later, RRSPs are still the go-to way to save for retirement and reduce what you pay in taxes.

In a nutshell, an RRSP is a special savings plan that helps Canadians save for retirement. 

Anything you contribute (aka the money you deposit) into your RRSP account reduces your total income to determine your “taxable income” (or the amount your taxes are calculated on). So every dollar you set aside in an RRSP savings or investing account cuts down on what you owe in income taxes to the Canada Revenue Agency (CRA).

The other big benefit: the money you contribute to the RRSP is “sheltered” from taxes until you withdraw the money. That means you don’t pay a dime in taxes until you start cashing out—which helps you grow some serious savings for the future.

How does an RRSP work?

On the surface, it’s simple: you open an account and make contributions—daily, weekly, monthly, annually, whenever you want. You file your tax return and get a deduction for anything you deposited into the RRSP account for that tax year.

But there are RRSP rules to know. Before we answer all your burning questions about the RRSP savings vehicle, let’s first get under the hood and understand the mechanics of how it works.

RRSP contribution limit basics

The RRSP is such a powerful tool to save on taxes and grow your savings that the federal government and the CRA actually put a cap on how much you can contribute each year. Here’s how it works:

• 18% up to the annual cap: You can contribute a maximum of 18% of your earned income from the previous year to your RRSP each year, up to a maximum limit that’s set by the federal government every year. Your contribution limit is whichever number is lower.
• RRSP over-contributions: It’s possible to over-contribute to your RRSP. So it’s important to stay on top of your annual deduction limits and check in on your CRA My Account to avoid any penalties.
• Carry-forward room: Didn’t make any RRSP contributions in the last year or so? No sweat! You can roll over any RRSP contribution room from previous years into the future. It’s kind of like having a store credit that you can use for future spending.

The “Age 71″ rule

All good things come to an end, right? You can contribute to an RRSP until December 31st of the year you turn 71 years of age, and then it must be converted into a Registered Retirement Income Fund (RRIF). A RRIF is like the sequel to a great movie (the RRSP): Not as good—as in you can no longer contribute to it—and formulaic, as in you’re required to withdraw a certain percentage each year so the government can get its tax revenue back. 

Alternatively, you can purchase an annuity, which is a guaranteed monthly income stream that is paid for the rest of your life. 

Also, make sure you assign a beneficiary to your RRSP, in case you pass away before you use it. That way the funds get handed down tax-free. Your beneficiary will only pay tax when the money is withdrawn.

How to invest inside your RRSP

Think of an RRSP as a flexible savings vehicle that can be powered in multiple ways. For instance, you can use the RRSP to hold various investments: from cash and GICs to bonds, mutual funds, ETFs, and stocks.

And let’s bust a myth: you don’t “buy RRSPs”—you make deposits into your RRSP account. With an investing account, you can then decide what to purchase inside that account (stocks, mutual funds, ETFs, cryptocurrency, etc.); or let the cash earn interest in an RRSP savings account or a guaranteed income certificate (GIC).

What’s an RRSP look like in action

To see in real-life terms how an RRSP works, here’s an example.

Lisa earned $90,000 last year. That means she’ll be able to contribute $16,200 to her RRSP this year ($90,000 x 18%). This is her RRSP contribution limit.

Lisa opens an RRSP account at her bank branch and decides to contribute $500 per month, for a total of $6,000 for this tax year.

Those RRSP contributions come in handy: when Lisa files her taxes for this year, she gets to deduct $6,000 from her total income. What that means is instead of paying taxes on $90,000 of income, Lisa will pay taxes as if she earned $84,000. The result—tax savings and potentially a sweet refund at tax time.

But remember that Lisa was able to contribute up to $16,200 to her RRSP this year. She didn’t have enough cash to max that out this year. No problem! The unused $10,200 that she has left over in her RRSP contribution space gets carried over and added to next year’s RRSP deduction limit.

So next year, Lisa will be able to contribute up to $26,400 to her RRSP in the future ($16,200 if she earns an income of $90,000 again this year + $10,200 of unused room carried forward from a previous year).

This might be beneficial for Lisa later in her career. For example, if she gets a promotion and starts earning $120,000 per year. Now she might have the ability to contribute more to her RRSP, and she can use some of that carry-forward RRSP contribution room to get a bigger tax break on her contributions.

What are the types of RRSPs?

In general, there are 4 types of RRSPs:

1. Individual RRSP

An individual RRSP is typically held at a bank, credit union, robo-advisor, or investment firm. You contribute to the account individually (meaning it’s all yours!) and the funds can be managed for you in a variety of investments, from cash, GICs, mutual funds, and more.

2. Spousal RRSP

A spousal RRSP is typically opened by a higher-income spouse (“the contributor”) to help the lower-income spouse (“the beneficiary”) save for retirement. It’s sort of like “gifting” some RRSP love to your partner: if you’re the higher earner, you’re giving away some of your own RRSP contribution room to your lower-earning spouse.

In turn, you reap the reward of a tax deduction (as well as major points with your spouse), while the beneficiary gets to withdraw the funds later in life.

3. Group RRSP

A group RRSP is typically set up by your employer and either you or the employer (or both) contribute to the RRSP.

4. Self-directed RRSP

A self-directed RRSP is usually opened at an online discount brokerage platform—a self-service way for you to invest on your own. It literally means you’re the boss: you manage the fund and decide what investments to buy (such as stocks, bonds, ETFs, and mutual funds) in the account.

What are the advantages of RRSPs?

RRSPs come with advantages and disadvantages. The 3 main advantages of RRSPs are:

• Contributions result in a tax deduction that reduces your taxable income and saves you money.
• Invested contributions grow tax-free inside the account until you take the money out.
• Tax-free withdrawals to purchase a first home (through the Home Buyers’ Plan) or to pay for education expenses for you or your spouse (through the Lifelong Learning Plan).

Eligibility criteria for RRSPs

Anyone living in Canada who has earned income and has filed a tax return can contribute to an RRSP. There is no minimum age to open an RRSP. For instance, a child actor or a teenager working part-time could file a tax return and start contributing to RRSPs.

But all rules still apply: Your RRSP must be closed by the end of the year you turn 71 and converted to an RRIF or an annuity.

What is the RRSP contribution deadline for this year?

The RRSP contribution deadline is 60 days after the end of the previous year. For the 2023 tax year (January to December 2023), the RRSP contribution deadline is February 29th, 2024.

When can I withdraw my RRSP?

Anytime! But remember, anything you take out will be counted as taxable income—meaning the amount you withdraw will be added to your income for the year. When you make a withdrawal, your financial institution must withhold between 10% and 30%, depending on the amount you take out.

Your RRSP must close by the end of the year you turn 71. This doesn’t mean it’s game over—you just need to convert your RRSP into an RRIF or a life annuity so you can start withdrawing money and the government gets its tax dollars back.

Do RRSP/RRIF withdrawals affect your OAS?

Yes. Withdrawals from your RRSP (and RRIF) are considered taxable income and depending on the size of your RRSP/RRIF and the amount you withdraw, that may impact how much you get from Old Age Security (OAS) benefits. That’s because OAS benefits start to get clawed back once your taxable income reaches around $80,000 and will be fully clawed back once income rises to around $130,000.