A Registered Retirement Savings Plan (RRSP) is an account registered with the Canadian government that’s designed to help you save for retirement. An RRSP can hold stocks, bonds, ETFs, GICs, and mutual funds – the right investment mix for you depends on your risk tolerance, strategy, and timeline.
You can start contributing to an RRSP as soon as you begin earning an income and file a tax return with Canada Revenue Agency.
Why do you need an RRSP?
- It offers an immediate tax deduction. Your RRSP contributions can be deducted from your income on your tax return, potentially reducing the amount of taxes you’re required to pay.
- The investments in the account grow tax-deferred. You won’t pay tax on your invested money as long as it stays in your registered account.
- It allows you to carry forward unused contribution room. You can contribute up to 18% of your earned income from the previous year (up to a maximum amount, adjusted for certain pensions) plus any unused contribution room to help fund your retirement.
Keep an eye on your contribution room.
Your RRSP contribution room doesn’t reset – it increases or decreases each year based on your income and past contributions. Your CRA Account will show your RRSP limit, so that you can check it before contributing. Note that you’re only allowed to go $2,000 over your limit as a lifetime cushion – anything beyond that triggers a monthly penalty, which can be an expensive mistake!
Use an RRSP to invest for the long term.
While the funds in your RRSP can grow tax-free, you will pay tax when you withdraw money from your account. Early withdrawals aren’t recommended, as they come with immediate withholding tax and the withdrawal is added to your income at tax time. Plus, that contribution room is lost forever.
Generally, it’s suggested that your RRSP stay focused on retirement savings, and other accounts, like a Tax-Free Savings Account (TFSA) or High Interest Savings Account (HISA) could be used for an emergency fund, or short-medium term savings goals.