– A Complete Guide –

March 2022

Even if you want to work forever, you most likely won’t be able to. You will need to retire from active employment at some point, and when you do, having a bunch of money saved up can come in handy. The Canada Revenue Agency (CRA) has recognized the need for retirement savings and thus created the registered retirement savings plan (RRSP) to encourage Canadians to save for retirement.

What is the Registered Retirement Savings Plan (RRSP)?

The registered retirement savings plan (RRSP) is an account you register with the CRA to put money aside for retirement. The RRSP is best known for its tax deferral and reduction benefits. Through an RRSP, you can invest in qualified investment assets such as Guaranteed Investment Certificates (GICs), bonds, stocks, mutual funds, Exchange-traded Funds (ETFs), Real Estate Investment Trusts (REITs), and most types of investments listed on a designated stock exchange.

Investments in certain derivatives, such as futures contracts, are not allowed in an RRSP. Also, you cannot invest in cryptocurrencies through your RRSP. However, you can purchase crypto ETFs as these are traded on designated stock exchanges.

If you invest in non-qualified investments, you can face tax consequences. You may be required to pay a fifty percent tax on the value of your non-qualified investments and additional tax on any investment income you earn.

How to Open an RRSP

You can open an RRSP at most financial institutions, including banks, credit unions, insurance companies, mutual fund companies, trust companies, and investment firms. The process of opening a registered retirement savings plan is straightforward; you will need to provide details such as your name, address, social insurance number (SIN), government-issued ID, and other required documents.

When you open an RRSP, the issuer will help you allocate your contributions across several financial assets. The RRSP issuer will create a portfolio selection of assets based on your age, risk appetite, time until retirement, and expected returns by retirement.

Some employers have a group or pooled RRSP to which you can contribute. Group RRSPs may have lower administrative costs, and some employers match your contributions up to a limit. Usually, employers deduct money from your earnings and transfer it into the company’s group RRSP.

You can open a self-directed RRSP through a brokerage or a financial institution if you know about investing. A self-directed RRSP allows you to control your investments in the RRSP; you can buy, sell and manage your investment portfolio.

Your RRSP account can remain open until the end of the year when you turn 71. By that time, you will have to withdraw the money in your RRSP, or convert it to an annuity or a registered retirement income fund (RRIF).

Benefits of a Registered Retirement Savings Plan

Here are a few reasons why you should open an RRSP account.

When you make contributions to your RRSP, you can claim the RRSP deductions when filing your income tax and benefits return. RRSP tax deductions reduce your taxable income causing you to pay less taxes or receive a higher tax refund. To claim an RRSP tax deduction for a tax year, you need to contribute to your RRSP by March 1st of the following year.

Also, when you invest the money in your RRSP and receive investment income, you can defer the taxes on your contributions and investment income. The money in your RRSP remains tax-free until you withdraw it. Given that the registered retirement savings plan provides you with income in retirement, this means that your income will be subject to tax at a lower rate.

If you have a higher income than your spouse or common-law partner, you can coordinate with them to reduce your taxes through a spousal or common-law partner RRSP. When you contribute to the RRSP for your spouse or common-law partner, you can receive the tax deduction for the contributions. Your spouse or common-law partner will remain the annuitant for the contributions and receive this money in retirement at a lower tax bracket.

The RRSP Contribution Room

Your RRSP contribution room is also called an RRSP deduction limit. This limit is the amount you can contribute to a registered pension plan, including a registered retirement savings plan, pooled registered pension plan (PRPP), or a specified pension plan (SPP) for yourself or your spouse or common-law partner.

The RRSP contribution limit determines how much you can contribute to a registered pension plan annually and is the maximum amount you can claim when filing your tax return. The CRA calculates your contribution room using 18 percent of your earned income, unused deduction room from the previous year, other pension adjustments, and the current annual RRSP limit.

The annual RRSP limit is indexed for inflation and can change annually. For 2021, this limit is $27,830, and increases to $29,210 for 2022. Suppose you cannot contribute to your RRSP up to your annual contribution room. Then, you can carry the unused contribution room forward to the next year.

If you’re wondering what happens when you contribute more than your annual limit to an RRSP, here’s how it works. The CRA will pardon an over-contribution of $2,000; if your over-contribution exceeds this amount, you will pay a one percent tax on the excess amount for every month it remains in your account.

It is important to confirm your RRSP contribution room to avoid tax penalties. The most accessible way to find your RRSP contribution room is through your CRA My Account profile. You can also confirm your deduction limit from the RRSP Deduction Limit Statement received with your latest notice of assessment or reassessment.

Withdrawing From A Registered Retirement Savings Plan

You can make withdrawals at any time from an un-locked RRSP. However, your RRSP issuer will withhold the applicable taxes on your withdrawal amount. If you withdraw from your RRSP before retirement, you will pay taxes at your marginal tax rate, which is usually higher in your active years of working than your retirement years.

There are a couple of ways to withdraw from your RRSP without paying tax. You can withdraw money from your RRSP tax-free using the Home Buyers’ Plan for your first home purchase or the Lifelong Learning Plan (LLP) for education purposes. However, you will need to repay the money over fifteen years for the Home Buyers’ Plan and ten years for the Lifelong Learning Plan.

Key Takeaway on RRSPs

RRSPs are a great way to save for retirement. Through an RRSP, you can invest and grow your money tax-free. Your contributions to your RRSP help reduce your taxes. When you withdraw money from your RRSP, the issuer will withhold taxes and remit them to CRA. Given your tax rate in retirement, the RRSP is a great way to defer taxes.

The RRSP is used for retirement savings, whereas a tax-free savings account (TFSA) is a more flexible registered account that allows you to save and invest for diverse purposes.