Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement savings plan that you or your spouse/common-law partner can contribute to. Contributions reduce your taxable income, which may lower your tax bracket for that year. The funds are set aside as investments for your retirement. The taxes aren’t eliminated but deferred until you withdraw the money.
Types of RRSPs
You can choose from three kinds: Individual RRSPs for your own savings, Spousal RRSPs to help a partner save and lower taxes, and Group RRSPs through your employer with easy payroll contributions.
How do RRSPs work?
An RRSP is a tax-advantaged account created by the Government of Canada to encourage people to save for retirement by offering tax benefits.With RRSPs, contributions are tax-deferred—meaning the money you deposit isn’t taxed in the year you contribute, but rather when you withdraw it in the future. This helps reduce your current year’s tax bill. Keep in mind, though, it’s a deferral, so taxes will still be due later—ideally at a time when your tax rate is lower.
How to open an RRSP?
You can start by meeting with a financial advisor, who will review your overall situation and help determine what you need from your investments to retire comfortably and in line with your goals. This assessment usually takes between 20 minutes to an hour and is a valuable step toward planning your future.
Benefits of a Registered Retirement Savings Plan (RRSP)
Once you understand how RRSPs function under the Canadian Income Tax Act, it becomes clear that they offer valuable tax advantages for most Canadians. Since people often earn less income during retirement, they are usually placed in a lower tax bracket. This makes RRSPs beneficial: you can receive tax refunds while contributing, and when you withdraw funds in retirement, you are typically taxed at a lower rate.
You can think of it like being under an umbrella—you’re sheltered (tax-deferred) while the money stays inside, and when it’s removed later, the “rain” (tax) is lighter. Another key advantage is that contributions can reduce your taxable income, and investment growth within the plan isn’t taxed until withdrawn.
As retirement approaches, you can transfer your RRSP savings directly into a Registered Retirement Income Fund (RRIF). Contributing to a spousal RRSP is also a smart strategy if one partner earns significantly more, as it helps balance retirement income and reduce overall taxes.
Additionally, RRSPs provide flexibility: you can use them for a down payment on your first home through the Home Buyers’ Plan or to fund education under the Lifelong Learning Plan.
Frequently Asked Questions
The Government of Canada introduced the first RRSP, originally called a registered retirement annuity, in 1957. At that time, individuals could contribute up to 10% of their income, with a maximum limit of $2,500.
The impact depends on your income level and the amount you contribute. The more you invest in an RRSP, the greater the reduction in your taxable income. In many cases, you could receive anywhere from 20% to 50% of your contribution back as a tax refund, though the exact amount will vary.
You can continue contributing to your RRSP until December 31 of the year you turn 71. After that, you must choose one of the following options:
A) Withdraw cash from your RRSP
You may take out part or all of your RRSP funds as cash. Any withdrawals must be reported as income on your tax return for that year, and withholding tax will apply. Taking everything out at once is generally not recommended since it could push you into a higher tax bracket.
B) Convert your RRSP into a Retirement Income Fund (RRIF)
To avoid the heavy tax impact of a large withdrawal, many people transfer their RRSP savings into a RRIF. You can make this conversion at any time before December 31 of the year you turn 71.
C) Purchase an Annuity
With your RRSP or RRIF funds, you can buy an annuity from an insurance provider. In exchange for a lump sum deposit, the company pays you a set amount, with interest, at regular intervals (monthly, quarterly, etc.). Payment amounts are fixed and cannot be adjusted.
There are two main types of annuities:
Term Certain Annuity: Guarantees payments for a fixed period, up to age 90. If you pass away before the term ends, the remaining payments go to your estate.
Life Annuity: Provides payments for the rest of your life, ending upon death, with no remaining funds going to your estate.
When someone dies, their RRSP is considered to have collapsed. The tax treatment depends on who is named as the beneficiary. Generally, the full value of the RRSP (or RRIF) at the time of death is added to the deceased’s income for that year’s tax return.
However, there are exceptions that allow the taxes to be deferred if the beneficiary is:
A spouse or common-law partner
A financially dependent child or grandchild under 18
A financially dependent child or grandchild of any age who has a mental or physical disability