A Registered Retirement Savings Plan (RRSP) is a savings plan, registered with the Canadian federal government that you can contribute to for retirement purposes.
When you contribute money to an RRSP, your funds are “tax-advantaged”, meaning that they’re exempt from being taxed in the year you make the contribution. Any investment income earned from investments held within the RRSP can then grow tax-deferred, as long as the money remains within the RRSP until it’s withdrawn.
RRSP contributions are tax-deductible, meaning that they can be deducted from your current year’s tax return, potentially reducing the total amount of taxes you pay.
RRSP vs. RSP
RSPs (Retirement Savings Plans) and RRSPs are different names for the same retirement savings plan that is registered with the Federal Government.
There’s no minimum age required to open an RRSP.
However, some financial institutions may require customers to be the age of majority. You can set up and contribute to an RRSP up to the end of the year you turn 71 as long as you are a Canadian resident, have earned income and file a tax return.
What are the benefits of investing in an RRSP?
- Tax-Deferred Savings: Any investment income earned on investments held within the plan is tax-deferred, as long as it remains in your RRSP.
- Tax Deductions: Your RRSP contributions are tax-deductible and may help to reduce the total amount of income tax you pay.
- Optimizing Deductions: You can carry forward your unused RRSP contribution room from years of lower income and use it in future years when your income may be higher. This can help you benefit from tax savings when you’re in a higher tax bracket.
- Income Splitting: If you earn more than your spouse or common-law partner, contributing to a spousal RRSP may help reduce the total amount of tax you pay.
- Financing your First Home or Education: You can withdraw money from your RRSP without being immediately taxed to pay for your first home or education, under the Home Buyers’ Plan or Lifelong Learning Plan (LLP).
When can I withdraw my money?
You can make a withdrawal from your RRSP any time as long as your funds are not in a locked-in plan, but withdrawals will generally be included in your income and subject to tax in the year of withdrawal.
Usually, a portion of the withdrawal will be withheld and remitted to the government as a prepayment of the income tax you will owe for the year.
Depending on the amount of taxable income you’re earning in the year of withdrawal, it may be beneficial to put off making withdrawals until a year in which your taxable income will be lower.
In addition, unlike withdrawals from a tax-free savings account (TFSA), withdrawals from an RRSP are not added back to your contribution room in the year following the withdrawal.
RRSP contribution deadline
You have until March 01 of the next year to contribute to your RRSP for the current year. For example, you have until March 01, 2023, to contribute to your RRSP for the year 2022.