RRSP, or “Registered Retirement Savings Plan,” is an integral part of retirement planning for many Canadians, offering fantastic tax benefits and boosting your savings. Life Buzz is excited to share answers to all your questions about RRSPs and help you take charge of your financial future!
What is an RRSP?
A Registered Retirement Savings Plan (RRSP), also referred to as just a Registered Savings Plan (RSP), is a retirement savings account registered with the Canadian federal government that Canadians can contribute to for saving for their retirement years.
An RRSP allows your savings and investments to grow tax-deferred while inside the RRSP account. Any interest, dividends, capital gains or other investment income is sheltered from taxation while inside the RRSP.
How do RRSPs Work?
An RRSP operates by allowing you to contribute money up to a maximum limit each year, which is based on your prior year’s earned income. For the 2025 tax year, the maximum you can contribute to your RRSP is 18% of your 2024 income, up to an annual limit of $32,490.
You can hold a wide variety of investments within your RRSP account, such as mutual funds, GICs, EFTs, etc. The income that your investments generate, whether interest, dividends or capital gains, grows tax-deferred. You do not pay any taxes on this income annually as you would in a regular non-registered investment account.
When you are ready to start drawing on your RRSP in retirement, the amounts withdrawn are added to your taxable income that year. However, since your income and corresponding tax rate are likely lower in retirement, the tax implications are minimized.
What Are the Different Types of RRSPs?
There are four main types of Registered Retirement Savings Plan accounts available, each with its own specific characteristics and benefits:
Individual RRSP
This is the standard RRSP account that most people use. You open and contribute to your own plan, benefitting from tax deductions and growing your personal retirement savings.
Spousal RRSP
With a spousal RRSP account, you make the contributions to the plan, but your spouse or common-law partner is the beneficiary. You get tax deductions while your partner accrues savings. An income splitting approach.
Group RRSP
A group RRSP is one set up by an employer and offered to employees as part of their benefit package. Contributions are made through regular payroll deductions for those who enroll in the group plan.
Self-Directed RRSP
A self-directed RRSP allows you to personally select and manage the investments within your account. This is a good choice if you want greater control over your asset allocation than typical pre-packaged RRSPs may offer.
What Are the Benefits Of RRSPs?
There are 5 major benefits that make RRSPs a vital part of financial planning for retirement for many Canadians:
Tax deductions: The main benefit of an RRSP arises from the tax deductions on your contributions each year. The amount you contribute, up to your maximum annual limit, is deducted directly from your total taxable income.
Tax-deferred growth: As mentioned, all the investment income your RRSP assets generate over the years grows tax-deferred while inside the account. This allows for faster capital accumulation compared to non-registered accounts, where taxes must be paid annually on interest, dividends and realized capital gains.
Carry forward unused contribution room: If you do not max out your RRSP contributions for one year, you can indefinitely carry forward that unused room to future tax years. This flexibility allows you to time RRSP contributions to align with when you expect to be in the highest tax brackets.
Reduce tax burden with spousal RRSPs: If you earn substantially more income than your spouse or common-law partner, you can contribute to a spousal RRSP and still claim the tax deduction yourself. This approach helps equalize your retirement savings and tax efficiency.
Accessing funds: You can access up to $35,000 tax-free from your RRSP for a first home purchase through the Home Buyers’ Plan. You can also withdraw funds tax-free to finance full-time training or post-secondary education through the Lifelong Learning Plan.
RRSP Investment Options
One of the major features of an RRSP is the flexibility to hold and invest your savings in various types of securities and funds. Here are six main investment options to consider within your RRSP:
- Cash and savings accounts – Offer principal protection but low returns.
- Guaranteed investment certificates (GICs) – Guaranteed interest rates, but returns are limited based on the term, usually 1 to 5 years. Low risk.
- Mutual funds – Professionally managed investment funds that own a variety of assets. Wide range of risk profiles.
- Bonds – Government and corporate bonds pay fixed interest rates. Low to medium investment risk.
- Stocks – Represent ownership shares in public companies. Higher risk but higher potential returns.
- ETFs – Exchange-traded funds that track market indexes but trade like stocks. Low investment fees.
Conservative investors may favour fixed-income investments like GICs and bonds. More aggressive investors may hold more equity mutual funds and individual stocks. By investing your contributions wisely, you can grow your savings much more quickly compared to simply depositing cash into your account.
When Should You Start Contributing to An RRSP?
Since there is no minimum age requirement, the best time to start contributing to an RRSP is early in adulthood or when you start your career. Here are four advantages of early contributions:
- Benefit from long-term, tax-deferred compound growth on your investments over decades.
- Take advantage of tax deductions on contributions each year, going back to when you were likely in lower income tax brackets.
- Potentially accumulate substantial retirement savings by retirement age.
- Retire earlier if desired by building your savings faster over a longer period.
To illustrate, if you began making annual RRSP contributions of $2,500 starting at age 25 and earned an average annual return of 6% on your investments, you would have accumulated over $700,000 in your RRSP by age 65. That provides a significant supplement to draw upon in your retirement years.
Consult a financial advisor to determine the optimum RRSP contribution amount for you based on your overall financial goals and desired retirement lifestyle.
What is The Maximum Age for RRSP Contributions?
You can continue to contribute to your existing RRSP each year up until the end of the calendar year when you turn 71 years old. Once you reach age 72, you can no longer contribute new funds or hold an RRSP.
You must collapse your RRSP before the end of the year you turn age 71 by:
- Withdrawing the full balance as taxable income.
- Converting the RRSP into a Registered Retirement Income Fund (RRIF)
- Using the funds to purchase an annuity.
It is essential to diligently contribute to your RRSP during your peak earning years in order to maximize your savings by the time you reach age 71.
When Can You Withdraw Funds From An RRSP?
With an RRSP, you can withdraw funds at any time for any purpose. However, unlike a Tax-Free Savings Account, RRSP withdrawals are added to your taxable income in the year withdrawn. A tax withholding amount is taken off the withdrawal by your financial institution.
Since RRSP withdrawals are fully taxable, it generally does not make sense to withdraw meaningful sums until you actually retire and are in a lower income tax bracket. Withdrawing too early can reduce the growth of your tax-deferred savings.
Also, the contribution room is not refunded when RRSP funds are withdrawn, unlike when withdrawing TFSA funds. So, regular RRSP withdrawals permanently reduce your future contribution room.
What Are Your RRSP Options when You Retire?
Upon retirement, your Registered Retirement Savings Plan savings can be accessed in 3 ways:
Registered Retirement Income Fund (RRIF): Your RRSP savings can be transferred to a RRIF. This provides taxable income payments during your retirement years but maintains the account’s tax-sheltered status. Minimum withdrawals based on your age must start the year after opening your RRIF.
Annuity: Some or all of your RRSP can be used to purchase an annuity, which is a financial product providing guaranteed fixed payments for life or a set period of time. Annuities allow you to convert your RRSP into a reliable retirement income.
Lump-sum withdrawal: Finally, you always have the option of collapsing your RRSP by simply withdrawing the entire balance in cash as taxable income. However, doing this eliminates many of the central benefits of an RRSP, so it is rarely recommended.
You have a retirement plan, check out our article to find out how much you need to retire and retiring allowance in Canada.
FAQs About RRSP Registered Retirement Savings Plan
Below are answers to the commonly asked questions regarding RRSP rules and how to use them when planning for retirement:
When is the best time to start an RRSP?
Since there is no minimum age, the ideal time to start an RRSP is early in your working career to benefit from long tax-deferred investment growth.
Can RRSP funds be withdrawn at any time?
Yes, you can withdraw RRSP funds at any time, but withdrawals are added to your taxable income in the year they are withdrawn. It is best to avoid withdrawals until retirement, when your tax rate is lower.
What happens to my RRSP when I turn 71?
By December 31 of the year you turn 71, your RRSP must be collapsed or converted to an RRIF or annuity before age 72. You can no longer hold or contribute to an RRSP after age 71.
Can I use RRSP funds for my first home under the Home Buyers' Plan?
Yes, you can withdraw up to $35,000 from your RRSP tax-free under the Home Buyers' Plan to put towards buying your first home. Repayments to your RRSP over time are required.
Can I withdraw from my RRSP to pay for education?
Yes, under the Lifelong Learning Plan, you can withdraw up to $10,000 tax-free from your RRSP to pay for full-time post-secondary education or training. Regular RRSP repayments are required over a 10-year period.
In summary, a Registered Retirement Savings Plan is one of the best tax-advantaged retirement savings tools available for Canadians. Making regular RRSP contributions that then grow tax-deferred can significantly increase the amount accumulated by the time retirement age approaches.
Consult a financial planner to develop a personalized RRSP investment and contribution strategy tailored to your retirement savings goals.
