The Registered Retirement Savings Plan (RRSP) is one of the best savings and investing tools available to Canadians.
This post covers some of the frequently asked questions.
RRSP and the Benefits
What is a RRSP?
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged account set up by the Canadian government to encourage retirement savings.
It is the most popular way to save for retirement in Canada and allow taxpayers to defer taxes. Taxes are only due when you make withdrawals.
This generally means any money contributed will be exempted from the calculation of your taxes in the year you make the contribution and grow tax free till they are withdrawn.
This contrasts with TFSA contributions that do not reduce your tax in the year you make the deposit, but withdrawals are tax free.
What are the benefits of opening an RRSP?
Beyond the tax refund you receive for contributing to an RRSP account, opening an RRSP has other benefits.
It allows you to save and invest in a tax-efficient way. Your savings grow tax-free.
You can also borrow from the account to buy your first home or pay for your education.
How much do you save in taxes with RRSP?
Your tax savings from RRSP contributions depends on a few factors.
The most important considerations are your current income and marginal tax rate versus what you think it will be when you retire in the future. Your income and the province where you live determines your marginal tax rate and ultimately the total tax you’ll pay.
You real tax savings is not just the tax refund you receive for your contributions. RRSP is a tax-deferred account. So, ignoring time value of money, your actual tax savings is the difference between
- the additional tax you would have paid if you did not make the contribution (represented by the tax refund you received)
- the tax you will pay when you withdraw the money in the future.
Opening and Investing in an RRSP
Who can open an RRSP?
You are eligible to contribute to an RRSP if you have a social security number (SIN), earned income and filed a tax return.
Unlike a Tax-free Savings Account that requires a minimum age of 18 to contribute, any one can contribute to an RRSP till December 31 of the year they turn 71.
How do I open an RRSP?
You can easily set up a new RRSP account through your financial institution including banks, credit unions, insurance companies, online brokerages and robo-advisors.
Can I open or contribute to an RRSP in the year I become a PR?
In short, the answer is No.
RRSP contributions are calculated as a percentage of your prior year’s income. For newcomers, your income before you arrived in Canada do not count. So, your contribution room in the first year is effectively Zero.
On the other hand, you don’t need earned income to start contributing to a Tax-free Savings Account. While waiting to be eligible for a RRSP, contributing to the TFSA is a good option – and perhaps a better one if you’re in a low tax bracket.
Should I open a managed or self-directed RRSP?
It depends on your specific circumstances, for example your investment knowledge, how hands-on you want to be and so on
With a managed account, you simply transfer the funds to your brokerage account (or set up pre-arranged transfers) and the financial institution will invest it on your behalf based on your risk profile. While this is more hands-on and requires little effort on your part, you will have to pay for management fees.
On the other hand, with a self-directed account, you assume all responsibilities for making the investment decisions and executing the trades. There are no management fees, but you may pay commissions for placing trades. Good news is most brokerages do not charge for buying ETFs.
Beginners may start with a managed account then move to a self-directed account when they have the necessary financial education.
Questrade is the best online brokerage in Canada. Click here to get started.
What type of investments can I have in an RRSP account?
Qualified investments like bonds, mutual funds, stocks, exchange-traded funds, savings deposit and guaranteed investment certificates can be held in an RRSP.
It is important to know that RRSP is not just an account. It’s more like a bucket or basket that can hold different investments depending on your risk profile and goals.
How many RRSP accounts can I have?
There is no limit on the number of accounts you can have. you can open different accounts across many financial institutions. Just make sure you’re tracking all your contributions to avoid exceeding your contribution limit.
What is the contribution limit for RRSP?
The amount you can contribute to an RRSP in a given year is made up of:
- contribution limit for the current year; plus
- any unused contribution room from previous years.
For 2020, the annual contribution limit is 18% of your 2019 earned income, subject to a maximum amount. The maximum amount changes annually but it is $27,230 for 2020.
That means, you must have had an earned income of $151,278 in 2019 to be able to contribute the maximum $27,230 under (1)
Learn more about RRSP contribution limits.
What is earned income for RRSP?
Earned income is made of employment income, self-employment earnings, and certain other types of income (e.g. rental income)
Can I carry forward my unused contribution room?
Yes. If you contribute an amount lower than your contribution room in a particular year, the difference can be “carried forward” to future years.
For example, if a taxpayer with a limit of $20,000 for the 2019 tax year contributes only $5,000, the difference of $15,000 will be added to his contribution room for the 2020 tax year.
Does RRSP contribution room expire?
No. See above.
However, note that the deadline to contribute to an RRSP is December 31st of the year you turn 71.
When is the contribution deadline?
You can still make RRSP contributions for a tax year within the first 60 days of the following year. When this date falls on a weekend, like in 2020, the deadline will fall on the following business day.
This is why you receive all those messages and see many RRSP adverts from financial institutions early in the year. You had till March 2, 2020 to make RRSP contributions for the 2019 tax year.
Any amounts contributed before this date will count towards your 2019 tax return and not 2020. This is important to know to avoid penalties for overcontribution.
The RRSP deadline for the 2020 tax year is March 1st, 2021.
How do I know my contribution limit?
Every taxpayer gets a Notice of Assessment (NOA) from CRA after their tax returns are processed. The NOA will include your contribution limit for the next year and any unused contribution room from prior years.
This information can be accessed any time during the year by logging in to your account with the CRA.
CRA’s My Account is a secure portal that lets you manage all your tax affairs online, including your benefit information and viewing your contribution rooms for the various registered plans. Click here for other options on how to get your contribution limit.
What is RRSP deduction limit?
The deduction limit is how much you can deduct from the current year’s income.
It is the sum of any unused deduction limit at the end of the previous year and your contribution limit for the current year (i.e. 18% of previous year’s earned income or $27,230 in 2020, whichever is lower).
It is possible to make an RRSP contribution but choose to defer making the tax deduction. For example, you can make a $5,000 contribution in 2020 but wait till 2021 to claim the tax deduction – if you believe you’ll have an higher income and be in a higher tax bracket.
RRSP contribution limit vs deduction limit: Are they the same?
No, the two limits are different.
For example, you could have a contribution limit of $15,000 in 2019 but only contributed $5,000. The unused contribution room of $10,000 will be added to your contribution limit for 2020. However, if you decided not to deduct the $5,000 contribution for the 2019 tax year, then your deduction and contribution limits for 2020 will be different.
Assume 18% of 2019 earned income is $17,000, then your total contribution limit in 2020 is $27,000 ($17,000 plus $10,000 unused contribution from 2019) and the deduction limit is $$32,000 ($17,000 plus $10,000 unused contribution from 2019 plus $5,000 unused deduction from 2019)
A simple way of getting this information is to login to myAccount on CRA’s website or check your latest notice of assessment.
Learn more: RRSP Deduction Limit Vs Contribution Limit
Does my Employer contribution affect my contribution room?
Yes, it does, and you should consider this when contributing to your other RRSP accounts to avoid over-contribution.
What happens if I overcontribute to the RRSP?
You can over-contribute to your RRSP by up to $2,000 with no penalty. After that, you may have to pay a tax of 1% per month on the excess contribution.
Note: Contributions made during the first 60 days in the year are used to calculate the contribution room of the previous calendar year.
How much can I expect as a refund?
The tax refunds to expect varies depending on your total income for the year, how much you contributed to your RRSP and even the province where you live.
EY has a calculator here that shows how much refund to expect in all the provinces and territories for a given income and RRSP contribution.
What do I do with the refund?
Your tax refund is yours to use as you please. You can go on a shopping spree, take a vacation or even buy the latest tech gadget.
Better still, use if for one of your financial goals like paying down a debt, re-contributing to your RRSP or TFSA, topping up your emergency fund and so on
Should I use a TFSA or RRSP?
The choice between the two depends on individual circumstances. A few things to consider include your
- financial goals: saving for retirement or a short-term goal, like the down payment for a car or house, emergency fund etc.
- Tax situation: A quick rule – to maximize the tax benefit of an RRSP, contributions should be made when you’re in a higher tax bracket and withdrawals when you’re in a lower bracket.
Are RRSPs worth it?
Definitely! See the benefits of opening an RRSP account above.
Can I withdraw from my RRSP any time?
Yes, you can always withdraw your contributions but there are tax implications.
CRA requires all financial institutions to charge withholding taxes on withdrawals. The withholding tax is 10% on the first $5,000, 20% on the next $10,000 and 30% after that.
|Withdrawal Amount||All Provinces (Except Quebec)||Quebec|
|$5,000 and below||10%||20%|
|$5,001 to $15,000||20%||25%|
Note that this is not the actual tax liability. The actual tax owing will be determined when you file your tax for the year. Come tax time when you file your tax, the withdrawal will be added to your other income for the year, the actual tax computed and a refund, if any, issued.
When should I withdraw from my RRSP?
Ideally, you should start withdrawal at retirement when you are in a lower tax bracket.
At what age can you withdraw RRSP without penalty?
There is always a tax impact to consider. While you won’t pay a withholding tax for withdrawals at 71, the withdrawals will be added to your annual income and taxed
How does withdrawals affect my contribution room?
In addition to paying income tax on early withdrawals from your RRSP, you may also loose the contribution room. That is, you won’t be able to recontribute that amount in the future.
The only withdrawals exempted from this are those done under the Home Buyer’s Plan and Lifelong Learning Plan.
On the other hand, withdrawals from a TFSA will be added back to your contribution room in the following year. One more reason why TFSAs are more flexible for savings for different goals.
How much can I withdraw for Home Buyer’s Plan (HBP) and Lifelong Learning Plan(LLP)?
With the Home Buyer’s Plan (HBP), you can take up to $35,000 out of your RRSP with no tax implication, starting from March 19, 2019. The maximum was $25,000 before then.
The Lifelong Learning Plan (LLP) allows you to take up to $20,000 out for you or your spouse’s education.
You won’t be on the hook for taxes on these withdrawals as long as you pay back the money within the specified time: 15 and 10 years for HBP and LLP respectively.
How do I take money out of my RRSP to buy a house?
To withdraw under HBP, simply fill out Form T1036, Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP and give to your RRSP provider. You may choose to withdraw multiple times or just once, as long as you are within the $35,000 limit.
Further Reading: Understanding the Home Buyer’s Plan: buying a home using your RRSP
How does a spousal RRSP work?
When there’s a large difference between a couple’s income, the spousal RRSP is a good income-splitting option for couples.
As the partner with the higher income, you can contribute to a spouse or common-law partner’s spousal RRSP. Your contribution will get you a tax deduction and count towards your contribution room. Your partner’s contribution room is not affected.
At retirement, withdrawals can then be made by the lower-income partner and taxed at the lower marginal rate.
When must I close the RRSP?
RRSP must be closed by December 31 of the year you turn 71.
What happens to the RRSP when I turn 71?
You have 3 options to do this:
- Convert it to a Registered Retirement Income Fund (RRIF) and make at least the minimum withdrawals starting from the next year,
- Buy an annuity from an insurance company and receive predetermined payments for the rest of your life
- Cash out your RRSP balance. This adds the value of your RRSP to your income for the year and will be taxed fully
What happens to the RRSP when I die?
The general rule is for the value of the RRSP to be included in deceased’s income for the year and taxed. However, the tax can be deferred if you have designated your spouse, a financially dependent child under 18 or a financially dependent mentally or physically infirm child of any age as the beneficiary of the RRSP.
Can I withdraw from my RRSP when unemployed?
There is no special provision for withdrawals during periods of unemployment. So, the withdrawals will still be treated like any other.
We hope you now have a better understanding of how RRSPs work now.
To learn more about RRSPs, check these posts about RRSP misconceptions, common mistakes to avoid, buying a house with money in your RRSP through the Home Buyers’ Plan, and funding your education using Lifelong Learning Plan.