A Registered Retirement Savings Plan (RRSP) is an investing and savings account that allows you to grow your money with tremendous tax benefits. RRSPs can hold numerous qualifying investments, including stocks, bonds, and mutual funds. And because your money grows tax-free, it can be a powerful way to take advantage of compound growth. <\/p>\n\n\n\n
Though they have contribution limits and withdrawal rules, RRSPs are simple to understand and use. If you\u2019re considering opening one for your investments, here\u2019s what you need to know. <\/p>\n\n\n\n
A Registered Retirement Savings Plan (RRSP) is a government-sponsored retirement account<\/a> that allows you to save money for the long term, while also taking advantage of certain tax breaks.<\/p>\n\n\n\n You can open an RRSP at most financial institutions, including banks, credit unions, trusts, and insurance companies, or your employer may offer a company-sponsored RRSP (called a \u201cGroup RRSP\u201d), often with a contribution match. <\/p>\n\n\n\n\n With an RRSP, you save on taxes in two big ways. First, any contributions you make can be deducted off your taxable income, up to your contribution limits. For instance, if you make $60,000, and you contribute $5,000 to your RRSP during the year, then you can deduct $5,000 from your taxable income and pay taxes on $55,000. <\/p>\n\n\n\n Second, your investment gains are tax-deferred. That means, no matter how much your investments grow, you won\u2019t pay capital or dividend gains to the Canada Revenue Agency (CRA), at least not for now. The only time you pay taxes is when you withdraw money from your RRSP in retirement. At that point, each withdrawal you make will be taxed at your marginal tax rate which, if you\u2019re retired, will most likely be lower than the tax rate you have now.\u00a0<\/p>\n\n\n\n RELATED:<\/strong> How Much Do You Need to Retire in Canada?<\/a><\/p>\n\n\n\n Every year, income-earning Canadians between the ages of 18 and 71 can contribute to their RRSPs up to the maximum amount. The contribution limit is either 18% of the previous year\u2019s earned income or an amount specified by the CRA, whichever is less (for 2022, that amount is $30,780)(1).<\/sup> <\/p>\n\n\n\n For example, if you made $100,000 last year, you can contribute up to $18,000. On the other hand, if you made $250,000 last year, then you would only be able to contribute the CRA\u2019s imposed maximum for that year. Since18% of $250,000 would be $45,000, you would be able to deduct the $30,780 limit.<\/p>\n\n\n\n Contributions are taken directly from your paycheque pre-tax (without being taxed) and added to your RRSP. Once you have funding in your account, you can hold it in savings accounts and bank products (like GICs), or invest it in certain qualifying securities like stocks and mutual funds.<\/p>\n\n\n\n RRSPs have no minimum age requirement. If you\u2019re earning income and filing a tax return\u2014and you\u2019re a Canadian citizen\u2014you or your guardian can open an RRSP.<\/p>\n\n\n\n That said, RRSPs do <\/em>have an age maximum. You can open and contribute to your RRSP until the year in which you turn 71. By the end of that year, you have to convert your RRSP into a Registered Retirement Income Fund<\/a> (RRIF) or an income annuity. Failure to do so will result in a very, very hefty tax bill: the CRA will treat your RRSP as income for that year and tax you according to whatever tax bracket your RRSP puts you in.<\/p>\n\n\n\n You can contribute a maximum of 18% of last year\u2019s income, up to an annual limit. For 2023, the annual contribution limit is $30,780.<\/p>\n\n\n\n The Canadian government frowns upon over-contributions, though they\u2019re not extremely harsh with punishments. <\/p>\n\n\n\n You can typically contribute $2,000 over your maximum limit with no penalties. After $2,000, you\u2019ll get several notices from the CRA asking you to withdraw your excess contribution. If you fail to withdraw the appropriate amount, the CRA will charge a 1% penalty per month on the excess.<\/p>\n\n\n\n For instance, if you\u2019re $5,000 over your maximum, you\u2019ll pay $50 per month ($600 per year) until you withdraw the $5,000. <\/p>\n\n\n\n If you can\u2019t contribute the maximum for any given year, the extra space rolls over into the next year. <\/p>\n\n\n\n For example, let\u2019s say your maximum contribution for both 2021 and 2022 is $18,000. Let\u2019s also say you contributed $6,000 in 2021, leaving you with $12,000 of unused space. That $12,000 will roll over into 2022. That means, during 2022, you can contribute $30,000 ($18,000 plus the unused $12,000). Unused contribution space will keep carrying forward like this until you turn 71. <\/p>\n\n\n\n At 71, you have to cash out your RRSP, turn it into an annuity, or convert it into a Registered Retirement Income Fund (RRIF). An RRIF is basically an annuity contract that will give you periodic payments until you run out of RRSP funding or you pass away. <\/p>\n\n\n\n RRSPs can be a great savings vehicle. But, if you withdraw before you turn 71, you could get hit with several taxes. <\/p>\n\n\n\n For one, you\u2019ll pay a withholding tax on the amount you\u2019re withdrawing. More than likely, you won\u2019t pay this directly: your RRSP provider will deduct the necessary portion from your withdrawal and pay the government on your behalf. Unless you live in Quebec, here\u2019s what you can expect to pay for the following withdrawal amounts:<\/p>\n\n\n\n On top of this withholding tax, you\u2019ll also need to report your withdrawals as income on your tax filings. The more you withdraw, the higher your taxable income and the more you\u2019ll pay in taxes for that year. <\/p>\n\n\n\n As if that wasn\u2019t enough, you\u2019ll also lose contribution room equal to the amount you withdraw. While you can still make the maximum contribution to your RRSP, you won\u2019t be able to recontribute any early withdrawals. This is different from a TFSA<\/a>, which allows you to replace what you withdraw. <\/p>\n\n\n\n Finally, keep in mind: withdrawing money means missing out on compound growth. The best way to build substantial wealth is to leave your retirement money invested for the long term. Even a small withdrawal could come back to haunt you. For instance, if you withdrew $5,000 from an account that had an 8% return, then after 20 years you\u2019d lose out on $19,634 in earnings. <\/p>\n\n\n\n Fortunately, the Canadian government isn\u2019t completely merciless on early withdrawals. While you can\u2019t withdraw from an RRSP for just anything, you can withdraw for two very important expenses: buying your first home (the Home Buyer\u2019s Plan) and paying for continued education (Lifelong Learning Plan). <\/p>\n\n\n\n Under the Home Buyer\u2019s Plan, you and your spouse can withdraw up to $35,000 each from an RRSP without paying taxes. As long as you use the RRSP money as the down payment on your first <\/em>home, you won\u2019t be penalized for making an early withdrawal. <\/p>\n\n\n\n But there\u2019s a catch \u2014 you and your spouse must repay what you borrow within 15 years. Typically, each year the government will require you to repay 1\/15th of what you borrowed. If you don\u2019t repay it, the CRA will include it as RRSP income on your taxes (they\u2019ll squeeze the money out of you one way or another). <\/p>\n\n\n\n So long as you can repay what you borrow, you can use $70,000 from multiple RRSPs to help buy your first home. <\/p>\n\n\n\n The Canadian government will also allow you to withdraw money tax-free if you\u2019re using it to pay for full-time education or training. <\/p>\n\n\n\n Yes \u2014 in order to be eligible for the LLP, you must be enrolled full time (unless you\u2019re disabled, in which case you can be enrolled part-time). <\/p>\n\n\n\n Under the LLP, you can withdraw up to $10,000 per year for a maximum of $20,000. You can withdraw money for a maximum of four years, but anything you withdraw must be repaid in 10 years. Like the Home Buyer\u2019s Plan, the Canadian government will require you to pay at least a tenth of what you borrow each year, though you can pay more than that without penalty. <\/p>\n\n\n\n You can have as many RRSP accounts as you want: there is no limit. But no matter how many RRSP accounts you have, your annual contribution limits won\u2019t change. Whether you have one RRSP or nine, you can contribute a maximum of 18% of last year\u2019s income, up to an annual cap.<\/p>\n\n\n\n RRSPs are only one type of government-sponsored retirement account. The other most popular account is the Tax-Free Savings Account (TFSA), which works similarly to RRSPs: each year, you have certain contribution limits, and any contributions can grow tax-free within the account. But, beyond that, TFSAs and RRSPs<\/a> have some key differences. <\/p>\n\n\n\nTax benefits of an RRSP<\/h2>\n\n\n\n
How does an RRSP work?<\/h2>\n\n\n\n
Benefits of investing in an RRSP<\/h2>\n\n\n\n
Who\u2019s eligible for an RRSP?<\/h2>\n\n\n\n
How much can you contribute to your RRSP?<\/h2>\n\n\n\n
What happens if you over-contribute to an RRSP?<\/h2>\n\n\n\n
What happens if you don\u2019t contribute the maximum within a given year?<\/h3>\n\n\n\n
What is the penalty for an early withdrawal?<\/h2>\n\n\n\n
How to withdraw from an RRSP without paying taxes<\/h2>\n\n\n\n
The Home Buyer\u2019s Plan<\/h3>\n\n\n\n
Lifelong Learning Plan (LLP)<\/h3>\n\n\n\n
How many RRSP accounts can you have? <\/h2>\n\n\n\n
How to open an RRSP<\/h2>\n\n\n\n
What\u2019s the difference between an RRSP and TFSA? <\/h2>\n\n\n\n