Registered Retirement Savings Plan (RRSP)

An RRSP can help you supplement your retirement income, giving you the freedom to enjoy your golden years with more financial security. The primary advantage of contributing to an RRSP is the tax benefits it offers, especially when compared to other investment accounts. The income earned in your RRSP is not taxed as long as it stays in the account. Because the money is tax sheltered, the total value grows more quickly than it would in other accounts.

You must pay tax when you withdraw the money from your RRSP. However, by the time you start collecting at retirement, you’ll likely be in a lower tax bracket than you were during your working years which means you’ll pay less tax when you withdraw your funds.

The maximum allowable contribution to an RRSP changes every year, so be sure to check with the CRA or with your accountant.

For example, say that the maximum you could contribute to an RRSP is 18% of your earned income, up to a maximum of $26,230. This doesn’t mean you’re not allowed to put more money into the RRSP, it just means that you cannot claim a deduction on the extra amount.

Yes, there are three types of RRSPs:

1. Individual RRSP: This is registered in your name and your name only. The investments held in an Individual RRSP, and the tax advantages associated with them, belong solely to you.
2. Spousal RRSP: This is registered in the name of your spouse or common-law partner. You contribute to this account and can take advantage of the tax deduction, but they own the investments within the account. To qualify for a spousal RRSP, you must:
• have lived together as a couple for at least 12 months
• have a child together by birth or adoption, or
• share custody and support of your partner’s children from a previous relationship

Additional information about Spousal RRSPs can be found here.

3. Group RRSP: These are common among employers who offer Group RRSPs as part of a benefit plan. Typically, your RRSP contributions are automatically deducted from your pay, and your employer may match or add to them, helping you save more money, faster. The benefits of Group RRSPs are that the employer usually pays the costs of opening and managing the plan. On the flip side, there may be limitations to the investment options, and the rules about when and how much money you can withdraw from the plan will vary depending on your employer and the financial institution holding the accounts.

TFSA stands for Tax Free Savings Account. While an RRSP is tax deductible, you’re essentially locking your money away for retirement – that’s why the early withdrawal fees are in place. Conversely, with a TFSA, your contributions and investment income are tax sheltered, but you can gain access to your money without penalty. Unlike the RRSP, which allows you to deduct contributions for income tax purposes, the TFSA contributions are not deductible in that way.

For example, if you earn $40,000 per year, and you contribute $3,000 to an RRSP, you’ll only pay income tax on $37,000. If you put that $3,000 into a TFSA rather than an RRSP, you’ll pay income tax on $40,000. In both cases, the $3,000 and investment earnings are tax sheltered.

Assuming you’re 70 years or younger, the RRSP contribution date is March 1st. It’s the same every year. However, December 31st of the year you turn 71, is the last day you can contribute to your own RRSP.