Registered retirement savings plans (RRSPs) have been available to Canadians for more than half a century, and for many people, they are the backbone of a retirement savings strategy. However, if you are new to investing, you may not be sure of what exactly an RRSP is. So, let’s start with the basics.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a special type of tax-advantaged investment account designed to help Canadians save for retirement.
The advantages of RRSPs
RRSPs offer several advantages for investors, including:
- Tax-advantaged retirement savings
- Tax deductions on contributions
- Tax-deferred growth
- Tax-free rollover to surviving spouse when named beneficiary of a decedent’s RRSP
- Direct transfers of a decedent’s RRSP assets to a named beneficiary without incurring probate fees
- Several different types of RRSPs from which to choose
- Funding home purchases and education goals
- Helping family members who are disabled
- Potential to qualify for other benefits
Types of RRSPs
At a high level, there are several basic types of RRSPs:
Individual RRSPs
Individual RRSPs are set up for you by a financial advisor and funded by you.
Spousal RRSPs
Spousal RRSPs are set up by a financial advisor for your spouse/common-law partner; spousal and regular contributions can be made to a Spousal RRSP using your respective contribution rooms.
Group RRSPs
Group RRSPs are established by employers to benefit employees and are held off-book with an Edward Jones preferred vendor.
RRSP contribution deadline
The annual contribution deadline for RRSPs is 60 days after December 31 of the previous year. The contribution deadline for the 2024 tax year is March 3, 2025.
RRSP contribution limits
Generally speaking, if you have no unused contribution room and no pension adjustments, your contribution limit will be the lesser of:
- 18% of your previous year's earned income, or
- The maximum limit set by the government ($31,560 in 2024; increasing to $32,490 in 2025).
For example, if you make $100,000 in 2024, and you contribute 16% of your income, your contribution would be $16,000. Because $16,000 is less than 18% of your annual earned income and also less than the annual maximum limit set by the government, that unused contribution amount of $2,000 (calculated as $18,000 - $16,000 = $2,000) be carried forward indefinitely until you make that contribution. This allows you to catch up on your retirement savings if you have initially contributed below your set limit.
How RRSP contribution room is calculated
Your receive information about your contribution room on your annual Notice of Assessment from the CRA. The following factors can affect the amount of your RRSP contribution room:
- Your “earned income” from the previous year, including net income from employment (such as salaries, bonuses, tips and gratuities), self-employment, business partnership, and net rental income from real estate
- Spousal support received
- Royalties
- Your unused RRSP contribution room from previous years, which can be carried forward indefinitely
- Any pension adjustments (e.g., employer pension plan contributions) and reversals
- The maximum contribution limit set annually by the federal government
The amount you can contribute each year is calculated annually by the Canadian Revenue Agency (CRA). RRSP contribution room is based on certain types of earned income as defined in the Income Tax Act. Pension income, CPP1 and OAS retirement benefits, as well as most forms of passive investment income, such as capital gains, interest and dividends, are not included in the definition of earned income for the purposes of calculating your RRSP contribution room.
RRSP maturity
An RRSP matures (i.e., can no longer continue as an RRSP) on December 31 of the year in which the RRSP holder turns age 71. At that time, contributions can no longer be made to the RRSP and the account can no longer remain open. RRSP contributions can, however, potentially be made to a spouse's or common-law partner's RRSP until the end of the year in which the spouse turns age 71, assuming the contributor has remaining RRSP contribution room.
Tax implications of withdrawing funds from an RRSP
You can withdraw funds at any age and time, but there are withholding taxes and deregistration fees plus applicable taxes associated with all withdrawals. Thus, if you need to withdraw a certain amount, remember to add in the extra you will lose immediately in fees and taxes – keeping in mind, the taxes can be steep.
Income tax| Withholding tax |
|---|
| Gross amount of withdrawal | Withholding tax in all provinces, except Quebec | Withholding tax in Quebec |
| Up to and including $5,000 | 10% | 24% |
| From $5,000.01 to $15,000 | 20% | 34% |
| From $15,000.01 and above | 30% | 44% |
| | | |
Additionally, withdrawals will be counted as income and will be taxed at your marginal rate for the year of withdrawal. Sometimes, you will owe an additional amount because the amount that was withheld is not enough to fulfill your tax obligation based on your tax bracket.
You should also remember that once funds are withdrawn, the RRSP contribution room does not regenerate – the room is lost forever. You can’t go back and recontribute that same amount later unless you meet a qualified exception.
Tax-exempt early withdrawals from RRSPs
While RRSPs are a long-term retirement savings vehicle, they do offer some flexibility to help achieve other financial goals in the right circumstances. Take note, if you choose to participate in the programs mentioned below, you will not be required to pay tax on withdrawn funds – unless you don’t repay them.
RRSP Home Buyer's Plan (HBP)
The Home Buyers’ Plan (HBP) allows you to withdraw up to $60,000 from your RRSP to buy or build a qualifying home for yourself or for a related person with a disability. The HBP allows you to take up to 15 years making equal payments during that time to pay back the withdrawn funds, with repayments starting the second year after the year of withdrawal.
RRSP Lifelong Learning Plan (LLP)
The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 in a calendar year from your RRSP to a maximum lifetime limit of $20,000, to finance full-time training or education for you or your spouse or common-law partner. You must repay equal amounts withdrawn over a 10-year period, starting the fifth year after the first withdrawal.
Both the HBP and LLP limits are personal to the individual, meaning partners or spouses can each withdraw the maximum and use the total funds toward a common home purchase or education goal.
A word of caution: you should be aware that your RRSP deduction for the year may be affected negatively if you participate in either of these programs. Funds withdrawn for either HBP or LLP within 90 days of being contributed to the RRSP cannot be deducted from income for the year. This can be complicated and confusing, which is another good reason to work with an Edward Jones financial advisor and your tax advisor to help you navigate these nuances.
In addition to permitting funds withdrawn under the HBP to be used to buy or build a qualifying home for a related person with a disability (even if you don't qualify as a "first time home buyer"), the Income Tax Act also allows for a rollover of a deceased individual's RRSP to the Registered Disability Savings Plan (RDSP) of a financially dependent (due to physical or mental disability) child or grandchild.
What happens at age 71?
Your RRSP must be collapsed by December 31 of the year in which you turn age 71. Your RRSP is said to "mature" at this point, and you must do one or more of the following when your RRSP matures:
Note that this isn't an all or nothing decision, and can include a combination of options. For example, you can take a portion of the funds as cash and transfer the rest to a RRIF. An Edward Jones financial advisor can work with you to help you find the choice right for you.
Investments your RRSP can hold
Some people mistakenly believe that RRSP accounts can only hold Guaranteed Investment Certificates (GICs), mutual funds or Exchange Traded Funds (ETFs). While those may indeed be the best approach for one individual, others may benefit from including a mix of stocks and bonds in their RRSP account. However, there are limits to the types of investments that may be held in these and other types of registered accounts. Investments must meet the definition of “qualified investments”; a term that is defined in the Income Tax Act. Ineligible investments (like commodity futures) held in an RRSP may attract significant negative tax consequences (including 50% tax on the value of the prohibited investment); so, you will want to make sure you work with your Edward Jones financial advisor to ensure your investments qualify.
Claiming an RRSP tax deduction in different year
You don’t need to claim your RRSP deduction in the same year you make the contribution. This is one of those little-known facts that can have a big impact on your bottom line. Just because you contribute to your RRSP for the benefits of tax deferral on the underlying investments, doesn’t mean you need to claim this deduction against your income for the same tax year.
You may choose to hold onto this deduction amount (all or some) for use in a future year. This could result in significant savings if, for example, you anticipate having a higher taxable income in an upcoming year. There is no time limit for how long you can carry forward the allowable deduction.
Contributing to a spouse or common-law partner’s RRSP after you turn 71
If you're over age 71, you may still be able to make contributions to your spouse’s or common-law partner’s spousal RRSP until the end of the year in which your spouse turns 71, assuming you still have unused RRSP contribution room available. This provides a planning opportunity for an individual who carries over contribution room or continues to accumulate it by accruing earned income after age 71 and has a younger spouse or common-law partner. It could, for example, mean the contributing spouse reduces or avoids Old Age Security (OAS) clawback (recovery tax) while providing tax-advantaged savings opportunities for the recipient spouse. This is a significant planning opportunity that is often overlooked. (The OAS clawback begins at $90,997 in 2025.)
Qualifying for other benefits via RRSP contributions
RRSP contributions can make the difference in qualifying for other benefits. It’s worth a careful look at the details to see whether an increase in your contribution could mean you qualify for income-tested benefits you may be on the cusp of receiving. For example, a reduced net income (as a result of RRSP contribution and deduction against your income) could lead to increased refundable tax credits, like the goods and services tax/harmonized sales tax (GST/HST) credit, or increased income-tested benefits like the Canada Child Benefit.
Tax bill on death
Your tax bill on death could potentially be the biggest tax bill you’ll ever pay. Many people include the full value of their RRSPs when they think about what their estate would look like if they were to prematurely pass away. In fact, the full value of your RRSP would be included in income in your year of death and taxed at what may be the highest marginal rate to which you’ve ever been subject. For example, assuming you had no other taxable assets, a $200,000 RRSP would be subject to an average tax rate of more than 35% and hit a marginal tax rate of over 50% in some provinces. There are tax deferral opportunities for spouses and children or grandchildren who are financially dependent due to disability; however, there are pitfalls that the unwary may fall into without the guidance of a professional financial advisor.
Withdrawals that make sense before retirement
Sometimes it makes sense to make RRSP withdrawals before retirement. Most individuals just forget about their RRSPs until retirement because they think it’s locked- in or assume there will be significant tax liabilities. The reality is that there may be times when it makes sense to withdraw funds from an RRSP before retirement. For example, if you’re in a year of low relative net income and have an urgent need for additional funds because of maternity or paternity leave or unemployment, accessing your RRSP may be the best of the available options.
It may also make sense to begin a drawdown strategy in the years leading up to retirement. If you anticipate you’ll be in a high tax bracket in retirement, drawing down on your RRSPs early may reduce the likelihood of OAS clawback or help keep the marginal rate lower over the long term. Taking a careful look at all the details is critical in these situations.
We can help
There’s much more than meets the eye when it comes to RRSPs. An Edward Jones financial advisor can help build your understanding of RRSPs and assist you in determining the RRSP strategy right for you.
