Planning for your retirement starts with understanding what RRSP means.
Many newcomers to Canada start hearing about RRSP (Registered Retirement Savings Plan) almost as soon as they land in Canada. But it takes them a long time to understand the meaning of RRSP and how it works.
Before we do a recap on what is an RRSP, you need to be mindful of the contribution deadline. If you have already hit your RRSP contribution target for 2021, you are on the right path to creating a better financial future for yourself and your family.
If you haven’t yet contributed, you have until March 1st to make your RRSP contribution and beat the deadline. You might even receive a bigger tax refund by increasing your RRSP contribution.
The 2021 RRSP contribution limit is 18% of earned income you reported on your tax return in the previous year (2020), up to a maximum of $27,830.
Questions & answers about RRSP
What is RRSP again?
RRSP stands for Registered Retirement Savings Plan. An RRSP is an investment account you contribute to each year in order to build up long-term savings, most often for retirement (as the name suggests).
How does the RRSP work?
The most important way an RRSP differs from a regular (non-registered) account or a TFSA (Tax-Free Savings Account) is how it’s taxed.
Your RRSP contributions are tax deductible. So, when you contribute to an RRSP, you pay less in income taxes than you would otherwise. And while the money is in the account, it grows tax-free. Later, when you withdraw that money again—typically in retirement—you pay taxes on it as an income, but a lower tax bracket.
How do you open an RRSP?
Opening an RRSP account is super easy. You can call up your bank or walk into the nearest branch and an RRSP account can be opened in a short time. Or you can walk into
Once you open an RRSP, you can set up regular or pre-authorized contributions.
What is the RRSP maximum contribution limit?
Each year, you can contribute 18% of your previous year’s earned income, or the year’s maximum contribution rate, to your RRSP—whichever is less. For the 2021 tax year, the RRSP contribution limit is $27,830. Also, if you didn’t max out your contribution room in previous years, that amount carries forward to the present.
To maximize your savings, consider setting up automatic contributions so the money is automatically taken out of your chequing account on a recurring basis.
Must your RSSP be in a bank?
No, your RRSP doesn’t have to be with the banks only. You can have your RRSP in any reputable financial institution or Robo-advisors such as CI Direct, iA, Nest Wealth, Justwealth, Wealthsimple, BMO Smartfolio and many others.
The traditional RRSP accounts in the banks offer dismal low interest rates. You can ask your bank to move your RRSP into a mutual fund that will pay you much higher interest rates, with only a modest risk.
Can you withdraw money from your RRSP?
Yes, you have the option to withdraw money from your RRSP before you retire. But this comes at a price. The severe tax penalty for early funds withdrawal from your RRSP could be as much as 25%
The only exception is if you are a first-time homebuyer. Then you take advantage of the Home Buyer’s Plan and be exempted from paying the penalty when you withdraw funds from your RRSP to make a down payment.
How do you use your RRSP when you retire?
Once you retire, the money in your RRSP becomes retirement income. To make these withdrawals, you’ll need to convert your account into an RRIF (Registered Retirement Income Fund). You have to do this by the end of the year that you turn 71, but you have the option to do so sooner.