Since its introduction in the 1950s, the registered retirement savings plan (RRSP) has been the cornerstone of many Canadian families’ retirement savings plans. Today, they are Canada’s best tool for saving and investing for retirement on a tax-advantaged basis.

Maybe you’re wondering what all the fuss is about, or perhaps you’re already familiar with RRSPs and are looking for some advice on how to best use them. Whatever your level of knowledge, this full-length guide will teach you everything you need to know about RRSPs.

We’ll cover both simple and complex topics, like how to open an RRSP, the difference between self-directed and managed RRSPs, and the pros and cons of using an RRSP versus a TFSA. Let’s get started!

What is an RRSP?

An RRSP is a savings plan that is registered with the Canadian government. You can contribute to your RRSP yearly and receive deductions from your taxable income in proportion to your contributions. The money in your RRSP can be invested into a variety of assets, including stocks, bonds, mutual funds, and GICs.

The History of the RRSP

The RRSP has been around since 1957 when it was first introduced in the Canadian Income Tax Act. Its purpose is to help Canadians save for retirement. Although at first slow to take hold, given that only 1 in every 50 tax-filers had an RRSP in 1968, today a majority of Canadians (51%) plan to contribute to their RRSP in 2024. 

Originally, the government wanted to encourage people to put money away for their golden years – so they created a tax incentive in the form of the RRSP deduction, which allows average Canadians to deduct their contributions from their taxable income. The result is that Canadians can save for their older age while lowering the amount they owe in taxes in the present. Essentially, it’s a win-win situation for the account holder, who benefits both immediately and upon withdrawal later in life. 

The Pros and Cons of RRSP Investing 

Let’s review upfront the pros and cons of this retirement account, before jumping into more of the mechanics.

Pros

The main advantages of an RRSP are:

• The tax deduction you receive for your contributions
• The ability to grow your money tax-free until you withdraw it in retirement
• The flexibility to choose how and where you invest your money

Cons

On the flip side, there are a few potential disadvantages to be aware of:

• You will have to pay taxes on your withdrawals in retirement (although you will likely be in a lower tax bracket than when you were working)
• If you withdraw money from your RRSP before retirement, you will have to pay taxes on it and may also be subject to a penalty
• There is an RRSP deadline for contributing each year (March 31st), after which you cannot contribute for that year

How Do I Open An RRSP?

You can open an RRSP at most financial institutions in Canada, including banks, credit unions, and investment dealers. When you open an account, you will need to provide some personal information such as your name, address, date of birth, Social Insurance Number (SIN), and employment information.

You will also need to decide how you want your RRSP contributions to be deducted from your paycheck – most employers can deduct them automatically. You can also contribute amounts you have already paid taxes on, such as a tax refund.

Finding the Right Time for Your RRSP

Planning for retirement is often something that people put off because it can seem like such a long way away. The sooner you start saving, however, the better – your money will have more time to grow, and you’ll be less likely to feel the pinch when you’re retired. 

The best time to start contributing to an RRSP is as soon as you start earning income. If you wait too long, you might find that it’s difficult to catch up.

Your Contribution Room

The amount you can contribute to your RRSP each year is based on your income and the amount of RRSP “contribution room” you have. The government sets aside a certain amount of contribution room for everyone – you start accruing it as soon as you start earning income, and it carries forward from year to year if you don’t use it all up.

For most people, the maximum amount they can contribute in a given year is 18% of their previous year’s earned income, up to a maximum limit. For example, if you earned $50,000 last year, your contribution limit for this year would be 18% of $50,000, or $9,000. 

If you didn’t contribute anything to your RRSP last year, your contribution limit for this year would be $5,000.

You can check your contribution room by logging into your MyCRA account, or by calling your financial institution. If you haven’t yet set up a MyCRA account, here’s an excellent guide to help you get started. This way, you will never lose track of your RRSP contribution room. 

The Benefits of Tax-Deferred Growth

All of the income made from investments in your RRSP is tax-deferred, which means you don’t have to pay taxes on it until you withdraw the money in retirement. 

This is a big advantage because it allows your money to grow more quickly – if you were taxed on your investment income every year, it would reduce the amount of money available to reinvest, and therefore slow down the growth of your portfolio.

The Compounding Effect

Another reason why it’s important to start saving for retirement as early as possible is that of compound interest. This is when the earnings from your investments (such as dividends and capital gains) are reinvested, and then earn an additional income yourself. 

The earlier you start investing, the longer your money has to grow, and the greater the effect of compound interest.

Figure 1. Source: RBC Royal Bank

The chart above (Fig. 1) depicts simulated tax-free growth of an RRSP account with $50 contributed every week, compounding at 6% annual interest, over a 30-year period. The end result is over $215,000 in tax-free savings, which is made possible by investing through an RRSP.

How Much Should I Contribute?

There is no set answer to this question – it depends on factors such as your age, income, investment goals, and risk tolerance. A good rule of thumb is to contribute at least enough to take advantage of any employer matching programs, and then increase your contributions gradually over time.

Employee Matching Programs

One of the most effective ways to save for retirement is to take advantage of employee matching programs. These programs are offered by some employers, and they match a certain percentage of your RRSP contributions (usually between two and six percent). So, if you contribute three percent of your salary to your RRSP, your employer will also contribute three percent.

This is effectively free money – so if your employer offers this benefit, be sure to take advantage of it!

The Many Ways to Use an RRSP

Planning for paying for your retirement is just one of the ways you can use the money in your RRSP account. There are also other options available to you:

• The Lifelong Learners Plan
• A Registered Retirement Income Fund (RRIF)
• Annuity
• Lump-sum Withdrawals
• The Home Buyer’s Plan

The Lifelong Learners Plan

The Lifelong Learning Plan (LLP) allows you to withdraw funds from your RRSP tax-free to finance full-time training or education for you or your spouse. To be eligible, you must repay all amounts withdrawn within a period of ten years. It allows you to withdraw $10,000 per year with a maximum withdrawal of $20,000.

How to Enroll in The Lifelong Learners Plan

You can apply for the Lifelong Learning Plan by completing Form RC4060 from the Canada Revenue Agency (CRA). You will need to provide information about your RRSP, yourself, and your spouse or common-law partner. Once you have completed the form, you will need to send it to your financial institution for review and submission.

Pros and Cons of the Lifelong Learners Plan

The main advantage of the Lifelong Learning Plan is that you can withdraw money from your RRSP tax-free to finance your education or training. The main disadvantage is that you will need to repay all amounts withdrawn within ten years. 

This may be a barrier to some who may want to keep the funds in the RRSP longer. Withdrawing money also comes with its own opportunity cost of any lost potential gains on investments that the money may have earned in the account.

A Registered Retirement Income Fund (RRIF)

An RRIF is a retirement income option that you can choose when you want to start receiving payments from your RRSP. With an RRIF, you can convert your RRSP savings into a regular stream of income. You can set up an RRIF with any financial institution where you have an RRSP.

How to Convert Your RRSP Into an RRIF

The first step is to contact the financial institution where you have your RRSP and let them know that you want to convert your RRSP into an RRIF.

You will need to fill out a few forms, including:

• A form authorizing the conversion of your RRSP into a RRIF
• A spousal consent form if you are married or common-law partners
• An application for a direct deposit of your payments, if you want to receive your payments by direct deposit.

Once the forms are complete, you will need to send them to the financial institution along with any other required documentation. The financial institution will then open an RRIF account for you and transfer the funds from your RRSP.

Annuity

An annuity is an insurance product that provides guaranteed income for life. You can use your RRSP to purchase an annuity, which can provide security and peace of mind in retirement. Annuities come with their own set of pros and cons.

Pros of an annuity:

• Guaranteed income for life
• Can provide peace of mind in retirement
• May be eligible for a tax deduction

Cons of an annuity:

• Once you purchase an annuity, you cannot change your mind – the money is locked in
• Annuities can be expensive and there are often fees associated with them

A Lump-Sum Withdrawal: Avoid This Tax Penalty!

A lump-sum withdrawal is when you withdraw all of the money from your RRSP in one lump sum. This option should be considered carefully, as there are taxes and penalties associated with withdrawals.

Withdrawing money from your RRSP before you retire can trigger a number of RRSP withdrawal tax consequences. First, you will have to pay income tax on the withdrawal. Second, if you are under the age of 71, you will also be subject to a withholding tax.

The withholding tax is a percentage of your RRSP withdrawal that is withheld by the financial institution and sent to the CRA.

The current rates of RRSP withholding taxes are as follows:

• Up to $5,000: 10%
• $5,000 to $15,000: 20%
• $15,000 or more: 30%

The Home Buyer’s Plan

The Home Buyer’s Plan (HBP) is a program that allows first-time home buyers to withdraw funds from their RRSP to help finance the purchase of their home. To be eligible, you must repay all amounts withdrawn within a period of fifteen years. You can borrow up to $35,000 tax-free to use for any down payment toward the purchase of a house.

How to Enroll in the Home Buyer’s Plan

If you’re interested in taking advantage of the Home Buyer’s Plan, there are a few things you need to do:

1. Contact your financial institution and let them know that you want to participate in the HBP.
2. Fill out a form from the Canada Revenue Agency (CRA) and send it to your RRSP issuer.
3. Receive your confirmation letter from the CRA. This letter will have important information about your HBP, including how much money you can withdraw and when you need to repay it.
4. Withdraw the money from your RRSP. You have up to 15 years to repay the amount borrowed into your RRSP.

What is the deadline for contributing to my RRSP?

The deadline for contributing to your RRSP is usually the end of the calendar year, or February 29th of the following year if it’s a leap year.

What are the benefits of contributing to an RRSP?

There are a few key benefits to contributing to an RRSP:

• You can receive a tax deduction for your contributions
• The money in your RRSP can grow tax-free until you withdraw it
• Withdrawals from your RRSP are taxed at a lower rate than income from employment 

What are some things to consider before making an RRSP contribution?

Before you make any decisions, it’s important to consider a few things:

• Your current financial situation and whether you have any debt
• Your current tax bracket
• Your retirement goals and how much money you will need to save
• The different types of RRSPs and investments available

What is the difference between a self-directed and managed RRSP?

Your RRSP account is a valuable tax-free savings vehicle that you can use to invest in a variety of assets, including stocks, bonds, GICs, mutual funds, and exchange-traded funds (ETFs).

When it comes to investing in your RRSP, you have two main options: self-directed or managed.

A self-directed RRSP gives you the freedom to choose your own investments. With a self-directed RRSP, you are in control of your investment decisions and can choose from a wide range of investment options.

The main benefit of a self-directed RRSP is that you have the flexibility to tailor your investments to meet your specific goals. 

For example, if you’re looking for growth potential, you can invest in stocks or mutual funds. If you’re more interested in stability and income, you can invest in GICs or bonds.

A managed RRSP is a type of RRSP that is administered by a professional investment manager. With a managed RRSP, your investment decisions are made for you. The main benefit of a managed RRSP is that it offers the potential for hands-off investing and can help to simplify your financial life.

When it comes to choosing between a self-directed and managed RRSP, there is no right or wrong answer – it ultimately depends on your personal preferences and financial goals.

If you’re not sure which type of RRSP is right for you, we recommend speaking with a financial advisor who can help you make this decision.

What are some common RRSP providers?

There are many popular RRSP providers in Canada; for instance, you could get a Manulife RRSP, RBC RRSP, or CIBC RRSP (to name just a few of the many providers available). Others include TD, BMO, Scotiabank, and National Bank. 

Choosing an RRSP provider is a personal decision and should be based on your individual needs and goals.

What to Look for in an RRSP Provider

Most people choose to open an RRSP with the bank they have always been with. However, it’s important to compare RRSP rates and fees from different providers before making a decision. Some things you may want to consider include:

• The type of investments offered (e.g. mutual funds, GICs, stocks, etc.)
• Minimum balance requirements
• Transaction fees
• Withdrawal penalties

If you don’t have a financial advisor, then getting one will also help with the process of opening your RRSP and choosing the right provider for you.

Choosing Between an RRSP and a TFSA

RRSPs are the account of choice for most Canadians – but that doesn’t mean they’re right for everyone. If you’re trying to decide between an RRSP and a TFSA, here are some things to keep in mind:

Generally speaking, RRSPs are best for people who are in a higher tax bracket and are looking to save for retirement. TFSAs, on the other hand, are better for people who are in a lower tax bracket and are looking for more flexibility with their savings.

The Pros and Cons of a TFSA vs. RRSP

Both accounts have their pros and cons, and come with considerations for anyone choosing between the two.

Pros of an RRSP:

• The money you contribute is tax-deductible, which can help to lower your overall taxable income.
• You can withdraw money from your RRSP at any time, but if you do so before the age of 65, you will be subject to taxes and possible penalties.

Cons of an RRSP:

• You are required to begin withdrawing money from your RRSP starting at the age of 71.
• If you withdraw money from your RRSP before the age of 71, you will be subject to taxes and possible penalties.

Pros of a TFSA:

• The money you contribute is not tax-deductible, but all earnings and withdrawals are tax-free.
• You can withdraw money from your TFSA at any time, without being subject to taxes or penalties.

Cons of a TFSA:

• There is a limit to how much you can contribute to your TFSA each year.
• If you withdraw money from your TFSA and then re-contribute it in the same year, you will be subject to over-contribution penalties.

The RRSP has been a mainstay of Canadian retirement planning for decades, and for good reason. However, the TFSA has become a popular choice in recent years, and for some people, it may be the better option. Ultimately, the decision between an RRSP and a TFSA comes down to your personal financial situation and goals.

RRSP Model Portfolios

If you’re looking for guidance on how to invest your RRSP, you may want to consider investing the funds in your RRSP in several ways. By choosing the right mix of diversified investments, you can grow your portfolio and retirement savings. Whether your RRSP is self-directed or managed, there are a number of ways to diversify your investments.

The three main types of portfolios are income, growth, and balanced. Each type of portfolio has its own asset allocation, which is the percentage of each asset class that is held in the portfolio. The table below shows the typical asset allocation for each type of RRSP model portfolio.

Income Portfolio:

• Asset Allocation: 30% stocks / 70% bonds and precious metals
• Objective: To provide a steady stream of income through dividends and interest payments.

Growth Portfolio:

• Asset Allocation: 60% stocks / 40% bonds
• Objective:  To achieve capital appreciation through stock price growth and corporate earnings growth.

Balanced Portfolio:

• Asset Allocation: 50% stocks / 50% bonds and precious metals
• Objective: To provide a mix of income and capital appreciation.

The type of RRSP model portfolio that is right for you will depend on your investment goals, time horizon, and risk tolerance. Generally, younger investors more willing to accept risk and volatility in their portfolio are better suited for “growth” portfolios that are particularly stock-heavy, whereas older and less risk-accepting investors are better off dedicating larger allocations to bonds and precious metals such as gold and silver. If you’re unsure of which portfolio to choose, it’s always a good idea to speak with a financial advisor.

How to Know Whether an RRSP is Right For You

This is a question only you can answer. Consider your unique financial situation and consult with a financial advisor to see if an RRSP is the best savings plan for you. In the meantime, if you’re interested in investing in a self-directed RRSP, in which you can invest in both conventional and non-conventional assets, such as gold, silver, ETFs, bonds, and more, we recommend reading our step-by-step guide to setting up a self-directed RRSP.