|RRSP||Types of investments||What we like||Start investing|
|Canada Life RRSP|
|iA Financial Group RRSP|
|National Bank RRSP|
|TD Bank RRSP|
Registered Retirement Savings Plans are one of the most popular ways for Canadians to prepare for retirement. If you haven't started saving yet, you should.
Did you know that even if you're drawing from the Canada Pension Plan and the Old Age Security, you may still need more money for your retirement?
This guide explores how RRSPs work, the best ones and how they could fit into your retirement planning.
What is an RRSP?
RRSP stands for Registered Retirement Savings Plan and is a highly tax-efficient way for Canadians to accumulate a significant pot of money to fund their retirement. Some financial institutions also use the term RSP meaning Retirement Savings Plan. Both terms refer to the same type of registered account.
As long as you have income from employment or self-employment in Canada you can contribute to an RRSP and claim a deduction against tax for the amount you contribute.
The money can be invested in a wide range of investments such as mutual funds, ETFs, bonds, shares in listed companies or cash. And while the money is held in the RRSP there is no tax payable on the income or growth the investments make, so they benefit from a boost in the return they make as a result of the tax, that would otherwise have been paid, being re-invested.
There is also the option of opening a self-invested RRSP where you manage the investments yourself.
You can use the funds from an RRSP to supplement your retirement income from any age but must start taking pension payments no later than the end of the calendar year in which you reach age 71.
RRSPs in Canada are a type of registered tax account. This means that they come with rules about how much and when you can invest and withdraw. Other popular registered accounts include Tax-Free Savings Accounts, Registered Retirement Income Funds, Registered Education Savings Plans, Registered Disability Savings Plans and locked-in accounts
How does RRSP work in Canada?
Anyone who has taxable employment or self-employment income in Canada and completes a tax return, can contribute a percentage of their income to an RRSP and claim the amount they contribute as a deduction against their income tax bill.
As an added incentive, a growing number of Canadian employers are offering an RRSP matching program. This is a scheme where the employer will pay a matching contribution to that of the employee. Typically, this will be a percentage of the contribution the employee makes, such as 50% of the contribution up to 6% of salary.
In this example, we assume that Sue earns $50,000 per year:
|RRSP contribution example||$|
|Sue pays 6% to RRSP||$3,000|
|Employer pays 3% (50% of employee contribution)||$1,500|
So, in this situation, the employee is immediately getting a 50% return on their contribution by taking advantage of the RRSP matching program. The employee’s contribution is normally deducted directly from their pay and paid into their RRSP account. And the employer contribution is not treated as taxable income.
Many employers offer a Group RRSP, where they use the same RRSP provider for all their employees. A Manulife RRSP is a very popular group option among employers. This normally has the benefit of reduced administration and management costs and is simpler for the employer to run.
But if your employer doesn’t offer an RRSP matching program you can still open an RRSP with a wide range of financial institutions such as banks, credit unions, trust companies or insurance companies.
The investments in the RRSP are not taxed on the returns they make, so benefit from additional compounding of the returns because the gross income or capital gain is re-invested. So, the same portfolio held in an RRSP will grow faster than it would in a tax-paid account.
There is also the considerable advantage that the amount you contribute to an RRSP is tax-deductible, so for example if your tax rate is 35% then a $1000 RRSP contribution reduces your tax by $350.
Although the RRSP enjoys tax-free growth for as long as the funds stay within it, there is tax payable when money is drawn out. How much tax depends on the circumstances of the withdrawal, which we’ll look at below.
Funds can be withdrawn at any time, although this isn’t advisable if it can be avoided as there are tax consequences. The normal way for an RRSP to provide income at retirement is via a Registered Retirement Income Fund (RRIF) or annuity. At the time you start drawing income the funds in the RRSP must either be withdrawn or transferred to one of these options.
You can start drawing a pension at any time, but the latest is the end of the calendar year in which you reach age 71.
When to convert an RRSP to an RRIF
We’ve already mentioned that money can be withdrawn from an RRSP at any time, so when do you have to convert an RRSP to a registered retirement income fund, or RRIF?
Firstly, there are strict RRSP withdrawal rules at age 71 that mean you must either withdraw the funds (subject to withholding tax) or transfer to either an RRIF or annuity by December 31st of the year you reach age 71. If you don’t take one of these actions on time, the entire RRSP fund is treated as income and is taxable as such.
Secondly, you need to know that once you have transferred your RRSP to RRIF you can’t make any more contributions to your own RRSP (although you could still contribute to a “Spousal RRSP” – more details below). So, if you want to carry on paying contributions you should defer transferring until a later year (as long as you haven’t reached age 71).
It’s important to understand that pension payments withdrawn from an RRIF are treated differently, for tax purposes than withdrawals from an RRSP.
The Federal Government sets a “minimum amount” that can be withdrawn each year from an RRIF, which is a percentage of the value of the investments held in the RRIF at the beginning of each year. This amount is based on your age and a table is published each year by CRA. The minimum amount must be withdrawn, although excess amounts can be drawn at any time.
No tax is withheld from the minimum payment although the income is taxable and must be declared on your tax return.
Any withdrawals over the minimum have withholding tax deducted by the institution holding your RRIF (known as the “carrier”). Additionally, the withdrawal is also treated as income, so further taxes may be payable if it takes you into a higher tax bracket.
Any withdrawal from an RRSP (with 2 exceptions – see below) is subject to withholding tax and is also taxable as income and must be declared on your tax return. The withholding tax is treated as tax already paid so there may be more or less tax due when you complete your tax return.
We would strongly recommend that, if you are considering taking withdrawals from your RRSP or transferring to an RRIF, you consult a financial adviser, as you may be able to pay less tax by withdrawing money from other investments and deferring drawing money from your RRSP.
How to withdraw from RRSP without paying tax
There are two ways that money can be withdrawn from an RRSP without tax being payable:
The Home Buyers' Plan (HPB) and the Lifetime Learning Plan (LLP). Here's how they work.
Home Buyers’ Plan (HPB)
You are allowed to withdraw up to $25,000 free of tax to help buy or build a qualifying home for yourself or a related person with a disability.
- You must be a first-time buyer
- The withdrawal must be paid back within 15 years
- Repayments don’t affect your contribution limits
- CRA will send you a statement of the outstanding HBP amount each year
Lifetime Learning Plan (LLP)
You are allowed to withdraw up to $10,000 per year (with a maximum of $20,000) to fund full-time education (or part-time if you’re disabled).
- No tax payable on the withdrawal
- Can’t be used for a child
- Can be used for a spouse or common-law partner (double the allowance if you’re both using it)
- Repayments can be delayed until the full-time education is completed
- Can be repaid over 10 years (after education finishes)
- Repayments won’t affect your repayment limits
How to invest in an RRSP
You can open an RRSP account with a range of financial institutions, including banks, credit unions, trust companies and insurance companies.
Firstly, you should check whether your employer offers an RRSP matching program. It would be a shame to miss out on an employer contribution if it’s available.
There are different investment options depending on the “carrier” you use so it’s important to use one that suits your objectives and the amount of choice you want in how the money is invested.
We’d always recommend you consult a financial advisor to help you choose the best carrier for your RRSP.
With most RRSP carriers there is a good deal of flexibility as to how and when you pay contributions, so you should be able to pay regular monthly, quarterly, or annual amounts or one-off contributions.
How much can I contribute to an RRSP?
The basic limit on how much you can contribute is 18% of your earnings for the previous tax year.
However, it’s not quite as straightforward as that. There is also an upper monetary limit which is published each year by the CRA.
Recent years’ maximums are:
|Year||RRSP Contribution Limit|
In addition, any unused contributions are carried forward and can be used at any time up to the end of the year in which you reach age 71.
The amount you can contribute each year is called your “RRSP Contribution Room”. CRA conveniently states this at the bottom of your tax summary and you can check this by logging into your CRA account.
However, as an example:
Mike earned $100,000 in 2021.
He contributed $6,000 to his RRSP.
In addition, he has $15,000 of “contribution room” carried forward from previous years.
|Mike's calculation for 2021 is:||$|
|$100,000 x 18% |
(i.e. less than contribution limit of $27,830)
|Plus unused contribution room||$15,000|
|Minus contribution already made||($6,000)|
|Mike’s contribution room for 2021 is:||= $27,000|
If he pays less than his $27,000 contribution room, the remainder will carry forward to be used in future years.
An added complication arises if you are a member of an employer's defined benefit pension scheme. As these schemes don’t have an explicit contribution, a prescribed formula is used to determine the value of the benefits you have accrued in the defined benefit scheme for the year. This amount is known as the Pension Adjustment (PA). The same also applies to Defined Profit-Sharing Plans (DPSPs).
The PA amount is shown on your T4 or T4A slip and reduces your contribution room as if it was an RRSP contribution.
How to contribute to RRSP:
Once you know your contribution room it’s straightforward to make a contribution. If you haven’t already got an RRSP you can easily open one online and make payments online.
But a word of warning: try not to overcontribute, as there are penalties and paperwork needed to withdraw the over-contribution.
Do you need help setting up an RRSP? Our experts can help you get started:
What is the deadline for RRSP contributions?
You can make an RRSP contribution for the previous tax year up to 60 days after the end of the year. This generally falls around March 1st but can vary depending on leap years and if December 31st or March 1st falls on a weekend.
The last day to contribute to an RRSP for 2022 and 2023 is March 1st of the next year.
What is an RRSP deduction limit?
For most people, the Contribution Limit and Deduction Limit will be the same, assuming they claim the whole contribution made as a deduction against tax in the year it is made.
However, in some circumstances, it may be beneficial to only claim part of a contribution as a deduction in the year it is made. An example might be where you know you have a bonus or pay rise in the following year, which might take you into a higher tax bracket.
So, if you made a $10,000 contribution in 2021, you could claim less than the full amount as a deduction, let’s say $5,000.
Your deduction limit for 2022 would then be your contribution room for 2022 plus the $5,000 carried forward.
When can you withdraw from an RRSP?
You can withdraw from an RRSP at any time, although it should be avoided where possible as there may be an RRSP withdrawal penalty from some arrangements.
RRSP early withdrawal will always incur withholding tax which varies depending on the amount withdrawn.
And from a planning point of view, you will be losing all the potential for tax-free growth that the withdrawn amount could have attracted.
How long does it take to cash out an RRSP?
If you do decide to withdraw cash from your RRSP it can be carried out very quickly, usually online. The exception would be if your RRSP is in a “Locked-in Plan” with a fixed maturity date.
Other than that, once the instruction has been given to your RRSP provider, the money, net of withholding tax will be paid within days.
Bear in mind that the entire withdrawal must be declared as income in the year it is drawn.
What happens to an RRSP when you die?
When you set up your RRSP, the provider will ask if you wish to appoint an RRSP beneficiary. If you do, it can be revocable, which means you can change the beneficiary at any time. If you choose to make it irrevocable you can only change the beneficiary with their written permission.
By appointing an RRSP beneficiary the money will usually be paid out to them without forming part of your estate for death taxes.
Income tax will normally be payable on the entire fund, but if your beneficiary is a qualifying spouse or common-law partner, the funds can be transferred into their RRSP free of taxes.
It’s important to seek financial advice when making these decisions, especially if your RRSP already has considerable value.
What is a spousal RRSP?
You are allowed to contribute some or all of your contribution room to an RRSP in the name of a qualifying spouse or common-law partner.
You claim the contribution as a deduction against your own income, and the benefit is that by having your retirement fund split between you, less tax may be payable when you start withdrawing a pension.
How many RRSP accounts can I have?
You can have as many accounts as you like, but your contribution limit remains the same regardless of how many accounts you have.
How long does it take to cash out an RRSP?
This will depend on the provider, and the circumstances of withdrawal, but in most cases, the funds will be available within a few days at most.