How to Use the RRSP to Save on Taxes and Retire Rich

A registered retirement saving plan (RRSP) is, for most of us, the first step towards saving for our golden years. The RRSP is a registered investment account that carries many tax benefits. The primary purpose is to shelter a portion of your income from being taxed right now. Not many other investments can do that.

Why should you contribute?

The amount of money you deposit into an RRSP in Canada is called a contribution. Your contributions accumulate over time and can be invested in various financial products. The RRSP is not in itself an investment, it’s simply a type of account. You need to decide how your contributions will be invested: equities, bonds, index funds, etc. You are, in essence, building an investment portfolio to fund your retirement years.

Your total contribution to an RRSP in Canada in any given year is subject to a limit based on your previous year’s income. So what is the contribution limit, and how can you invest your RRSP contributions? Your Canada Revenue Agency (CRA) account shows you your eligible contribution room and your eligible amount based on last year’s income. You can also find this on your Notice of Assessment (NOA).

Tax deferral

Any amount you contribute to an RRSP in Canada will be exempt from income tax until you withdraw it. Also, if you invest your contributions within your RRSP, any dividends or interest earned will be deposited in your RRSP account and will also be exempt from investment-related tax.

When it comes time to withdraw money from your RRSP in Canada, the amount you withdraw will be added to your annual income in the year you make the withdrawal. You must pay income tax according to the applicable tax bracket based on your total annual income for the year.

In a nutshell, the RRSP is the ideal place to grow your investment in a tax-free environment. You will be taxed eventually when you begin to withdraw. But a tax-free environment now allows your investments to grow more quickly so you can accumulate more wealth for retirement.

Lower marginal tax rate

Looking for a quick way to reduce your tax bill? RRSP contributions are hard to beat. Any contribution you make to an RRSP reduces your income and thus your tax burden. If you are a high-income earner, you can reduce your marginal tax rate quickly using RRSPs.

Any amount you contribute to your RRSP Canada account during the tax year will be subtracted from your gross annual income. When it comes time to file your income tax return, simply claim your total RRSP Canada contribution for the tax year. Your total contribution will be subtracted from your gross income, and you will only be taxed on the remainder.

Many Canadians contribute enough to their RRSP to knock their remaining income down to a lower tax bracket where their reduced income is taxed at an even lower rate. For many people, this results in an income tax return.

A great way to prepare for retirement in Canada

Planning for your retirement is essential for your future well-being. RRSPs in Canada are simply a way to set up your retirement income fund to pay yourself in your golden years after you stop working. Because fewer employers are offering pension benefits to their workers, setting up your plan becomes critical. 

In addition, government programs such as Old Age Security (OAS), Canada Pension Plan (CPP) and the Guaranteed Income Supplement (GIS) may not be enough to cover your basic needs. With some careful retirement planning now, your RRSPs will be a great source of income once you retire. Use the Hardbacon Retirement Planning Calculator to help you achieve the kind of retirement you want.

The different types of RRSPs in Canada

When the time comes to open an RRSP, several options are available. It all depends on your needs and goals. There are RRSPs you can open and manage yourself or share with a spouse. There is also an RRSP account opened through an employer’s contribution matching program. Let’s take a look at each.

Individual

An individual RRSP is an account that is registered in your name. It’s the RRSP account you need to create to start reducing your income tax burden while saving for your future retirement. Depending on your needs, you can either open a regular or a self-directed account.

Regular account: this type of account is offered by traditional financial institutions. Your financial advisor would then play a significant role in recommending investments in your portfolio such as mutual funds, GICs, etc.

Self-directed account: this type of account is offered by both traditional financial institutions and online brokers. You can choose this type of account if you would like to invest on your own without the help of an advisor. For this type of account, it’s preferable to have a good knowledge of investing principles and financial markets. But if you don’t, that’s ok too. There are many reputable robo-advisors that will build an investment portfolio for you based on your risk tolerance.  It’s not uncommon for investors to have both regular and self-directed RRSPs.

Spousal

A spousal RRSP is an RRSP account that is registered in the name of your spouse or partner. You can contribute to a spousal RRSP and claim a deduction. However, your partner will own the investments made. Simply ask your financial institution to open a spousal RRSP and start contributing. The objective is to split income more evenly in retirement. Here’s an example:

Let’s say you are a high-income earner and your partner isn’t. You can then reduce your tax burden by contributing to a spousal RRSP. When you are both retired, your spouse in a lower tax bracket can withdraw the funds and pay fewer taxes than what you would have paid.

What happens if your spouse withdraws the money before retirement? Here are the rules to keep in mind:

• If the withdrawal is within three years of the contribution date, you will have to pay tax on the withdrawal amount.
• If the withdrawal is within three years after the contribution date, your spouse will pay tax on the withdrawal amount.

Group

Group RRSP in Canada are offered by employers to their employees as part of their benefits package. If your employer offers a group RRSP, it’s essential to include it in your financial planning for retirement. You can quickly obtain an estimation of your retirement benefits with your employer’s plan by contacting your human resources advisor.

Tax benefits and maximums

When you contribute to an RRSP in Canada, you decrease your taxable income by the amount you contributed. So, not only are you putting money aside for the future, but you are saving on your taxes right now too. There is a limit, though. 

You can contribute up to 18% of your previous year’s income. In addition, the Canada Revenue Agency (CRA) sets an annual maximum contribution amount regardless of your income. For 2023, the maximum was $30,780. That means you could have contributed up to 18% of your income to a maximum of $30,780. For 2024, the maximum is $31,560. Here’s an example:

Suppose your income for the year 2023 is $100,000. You can contribute up to $18,000 toward your RRSP. You live in Ontario and contributed $10,000 to your RRSP account in 2023. Your taxable income after your $10,000 RRSP contribution is:

$100,000 – $10,000 = $90,000

If you hadn’t contributed any money to your RRSP account, the amount of income tax you would owe on your $100,000 income would be $23,708. But since you contributed $10,000 to your RRSP, your taxable income was reduced to $90,000. Now, you only owe $20,214 of income tax on your $90,000 income, thanks to your RRSP contribution.

By contributing $10,000 to your RRSP account, you saved $3,494 in taxes owed!

*DISCLAIMER: The figures used are for illustrative purposes only. Income tax brackets change every year to account for inflation and other variables. For the most up-to-date income tax information, please visit canada.ca.

Contribution room

If you have not contributed the maximum amount in past years, you will be eligible to roll over these unused amounts to the current and future years. The total of your unused contributions is known as “contribution room.”

The easiest way to check your contribution room for the following year is to visit My Account on the CRA website. When you sign in, scroll to the bottom to the section called RRSP and TFSA. There you will see your total unused contribution room. You’ll also find it on your previous year’s Notice of Assessment (NOA).

Penalties for over-contributing

An over-contribution happens when you deposit an amount of money into your RRSP account that is more than your contribution room.  If you over-contribute to your RRSP, you will need to correct the situation as quickly as possible to avoid a penalty. 

The Canada Revenue Agency (CRA) allows a lifetime wiggle-room of $2,000 in total excess RRSP contributions before the penalty kicks in.

For example, if you have over-contributed $3,000 to your RRSP, a monthly penalty is only imposed on $1,000.  The first $2,000 falls within the lifetime exception and, therefore, is not subject to a penalty.

The penalty is 1% per month, which is $10 according to the previous example. The charge for the whole year would be $120. It’s not advantageous for you to maintain excess contributions. 

You can easily check if you have overcontributed by looking at your Notice of Assessment (NOA). Your NOA is available through your online CRA account. You will also receive your NOA in the mail after you file your income tax return.

RRSP deadline

The last day you can make a contribution to an RRSP in Canada for the previous year is March 1, or February 29 during a leap year. That means any RRSP contributions you make in the first 60 days of the new year can be claimed on the previous year’s income tax return. 

For example, you can make contributions to your RRSP account until March 1, 2024 and claim them on your 2023 income tax return to reduce your total taxable income for 2023. 

Contributions you make to your RRSP after March 1, 2024 will have to wait to be claimed on your 2024 income tax return. You can contribute either a lump sum to your RRSP or contribute regularly using an automatic withdrawal plan.

Withdrawals

When you withdraw from an RRSP, you increase your taxable income by the amount withdrawn for the year in which you make the withdrawal. It is one of the significant limitations of holding an RRSP. Withdrawing from your RRSP is only beneficial if your current income is lower than it was in the year you made the contribution.

The financial institution you registered your RRSP with is obligated to withhold taxes on behalf of the government. The rates used are as follows:

	Tax withheld
RRSP Withdrawal	Canadians (Excl. Qc)
Up to $5,000	10%
$5,000 to $15,000	20%
$15,000 +	30%

If you are a resident of Quebec, your RRSP withdrawals are also subject to a provincial withholding tax of 15%.

During tax filing season, the financial institution that holds your RRSP will issue appropriate tax slips to indicate your withdrawals and the amount of tax withheld. When you file your income tax return, you may have to pay more if your marginal tax rate is higher than the tax withheld.

Can I withdraw money from my RRSP without paying taxes?

The short answer is yes. There are two situations where you can withdraw from your RRSP tax-free. If you want to purchase a home or pursue higher education, there are two programs that essentially let you borrow from yourself using your RRSP money. Let’s take a look.

The Home Buyer’s Plan (HBP)

If you’re thinking of buying your first home, the CRA allows you to withdraw your RRSPs, tax-free, to use the money. However, you’ll have to pay back the full amount you withdrew. The program is called the Home Buyers’ Plan (HBP). HBP is one of the main advantages of an RRSP account.

Since the new measures announced in 2024 by the Trudeau government, you can withdraw up to $60,000 through the HBP. Previously, the amount was limited to $35,000. Note that amounts withdrawn under the HBP must be repaid to your RRSP over a maximum period of 15 years. Previously, you had to begin repayment in the second year after the withdrawal. The grace period has now been extended to five years for withdrawals made or to be made between January 1, 2022 and December 31, 2025. If you use the HBP in 2024, you can start repaying it in 2029.

Here’s an example:

You withdraw $60,000 tax-free from your RRSP under the HBP to buy your home in 2024. You’re stressed because you think you’ll have trouble making the repayments, since inflation isn’t leaving much money in your wallet. Luckily, the federal budget gives you a little breathing room, with a five-year grace period!

Generally, for each year of your repayment period, you must repay one-fifteenth of the total amount withdrawn until the HBP balance is zero. This means you’ll have to deposit about $4,000 into your RRSP account every year for 15 years. You won’t get any tax benefits from repaying your RRSP, as these repayments are not considered an official contribution. If you miss a year and don’t deposit anything into your RRSP account, the CRA will automatically add this amount to your taxable income for that year.

Ready to participate in the Home Buyer’s Plan? Here’s what you need to do:

• Fill out form T1036 Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP
• Submit the form to your financial institution

If you’re a couple who are both first-time homebuyers, you can each withdraw up to $60,000 from your own RRSP accounts. That’s a potential $120,000 down payment!

Lifelong Learning Plan (LLP)

The LLP allows you to withdraw up to $10,000 from your RRSPs in a calendar year, tax-free. The funds withdrawn can be used to finance full-time training or education for you, a spouse, or common-law partner. You do not have to include the withdrawn amounts in your income, and you cannot withdraw more than $20,000 under the LLP.

You have 10 years to repay the amount withdrawn from your RRSP account. Generally, for each year of your repayment period, you have to repay 1/10 of the total amount you withdrew until the LLP balance is zero. If you withdrew $10,000, you would need to deposit at least $1,000 back into your RRSP account each year, for 10 years.

Ready to participate in the Lifelong Learning Program? Here’s what you need to do:

• Fill out form RC96 “Lifelong Learning Plan (LLP) Request to Withdraw Funds from an RRSP”;
• Submit the form to your financial institution

How much should you save for your retirement?

This is an important question. There is a balance between saving enough to fund your retirement and over-contributing.  Luckily, Harbacon has an RRSP Savings Calculator to take the guesswork out of saving for retirement. How much you should save depends on several factors.

Determine your retirement goals

First, you should determine your desired retirement age. Determine how much money you would need when you retire to sustain your desired lifestyle. Be sure to include the cost of living, travel plans, support for dependents, debts, etc. You also need to make sure to have funds set aside for emergencies.

Determine all your potential sources of retirement income

Next, inquire with the Canada Pension Plan (CPP),  or the Quebec Pension Plan (QPP) if you live in Quebec, to obtain your estimated earnings when you retire. Both CPP and QPP monthly payments will depend on how long you contributed to the program and your age when you start receiving your benefits. 

Please note, the later you take your CPP or QPP, the higher your monthly payments will be. You can choose to retire as early as age 60 or as late as 70.

Also, take into consideration the Old Age Security (OAS), which most Canadians are entitled to. You can start receiving OAS at age 65. You can also elect to defer it to age 70. 

Most Canadians are eligible to receive their OAS as long as they are residents or Canadian citizens and have lived in Canada for at least 10 years. If you qualify to receive OAS and have a low income at retirement, you are automatically enrolled in the Guaranteed Income Supplement (GIS).

Here are some other things to do to get a good picture of your retirement income:

• If applicable, inquire with your employer about your pension benefits. You need to obtain an estimation of your future earnings
• List all insurances that might have an impact on your retirement plans. Ask yourself whether your current insurance coverage would be enough when you retire to protect against the most common life risks
• Calculate the difference between your expected income and expenses. If your expected expenses exceed the total income for the sources listed above, then you should start saving as soon as possible in order to afford the life you desire at retirement! You might also want to delay your retirement a bit if necessary to achieve your plans. Even if your expected income exceeds your future expenses, you still have to save for emergencies to be financially secure when you stop working after retirement.

Retirement planning example

Let’s illustrate with an example. Mike estimates that he would need $2,000 monthly to maintain a comfortable lifestyle as a retiree. This is in addition to benefits he will be entitled to, such as Old Age Security (OAS) and the Canada Pension Plan (CPP). Mike plans to retire at the age of 65. We will assume his investments will generate a 4% annual rate of return.

Scenario 1: Mike started contributing at the age of 20

Mike would need to contribute $410 a month to his RRSP. Mike’s estimated total retirement savings at age 65 with a 4% rate of return would be about $619,000. His savings would allow him to withdraw just over $2,105 a month until he reaches the age of 99.

Scenario 2: Mike started contributing at the age of 30

Mike would need to contribute $665 a month to his RRSP. Mike’s estimated total retirement savings at age 65, with a 4% rate of return, would be about $607,000. His savings would allow him to start withdrawing just over $2,066 a month until he reaches the age of 99.

The two scenarios above show that when you start early, you can increase your savings substantially. Use the Hardbacon RRSP Savings Calculator to provide scenarios based on the amount you can save each year. You’ll be surprised how small changes can add up to big savings and greater wealth at retirement.

Impact of inflation on retirement plans

Inflation is what happens when the general price of things increases over time. It erodes the value of our savings. In simple terms, your dollar cannot buy as much tomorrow as it can today.  It’s essential to take inflation into account when you plan for retirement.

• Old Age Security is protected against inflation. This means when the cost of living goes up, the amount of your OAS income goes up as well
• If you are entitled to a group RRSP with your employer, check if it’s protected against inflation
• Your savings need to grow at a higher rate than inflation. In other words, you need to invest a specific portion of your savings in vehicles that can generate a higher income such as stocks, index funds, or equity ETFs, to name a few

Who can open an RRSP and how much does it cost?

As long as you have income from employment, any Canadian under 71 years old can open and start contributing to an RRSP account. It’s typically free to set up an RRSP account. You can arrange a meeting with your financial advisor at your financial institution to start the process. 

If you prefer, the process can also be done online. You can also open an RRSP account with another financial institution different from where you do your day-to-day banking.

Minimum amount

The minimum amount to open a new RRSP account varies from $0 to $1,000, depending on the financial institution. You also have the option to set up an automatic withdrawal. Your contributions are automatically debited from your chequing or savings account, and deposited into your RRSP account. There are usually fees for withdrawals, inactivity, or closing an account. So it’s vital to shop around.

How many RRSP accounts can you have?

You can open more than one RRSP account. Your contribution limit and the contribution room are not impacted by the number of RRSP accounts you own. That means your contribution limit is the same no matter how many RRSP accounts you have. For simplicity’s sake, it’s better to have one RRSP account. It’s easier to track your contributions. You will also have less tax slips to deal with during filing season.

Are online brokers worth it?

The short answer is yes. If you prefer more control over how your RRSP contributions are invested, you can minimize trading costs and management fees when you do it yourself. Generally speaking, online discount brokers offer:

• Low fees and/or zero commission trades
• Solid trading platforms for your mobile phone or desktop
• Almost the same types of accounts you would expect from your financial institution
• Same protection offered by traditional financial institutions under the Canadian Investor Protection Fund (CIPF).

You can use Hardbacon’s comparison tools to choose the best online brokerage for your needs.

What’s the difference between an RRSP and a TFSA?

The main advantage of a Tax-Free Saving Account (TFSA) is that any investment income made on your contributions is tax-free. Adding or withdrawing money from a TFSA has no income tax implications either. This means you have greater flexibility with a TFSA than with an RRSP. For example:

You deposited $10,000 during 2023 into your TFSA account, and you made a $1,000 return on investments. Whether it’s dividends, capital gains, or interest earned, this profit is exempt from taxes and you can withdraw anytime without having to pay any tax.

The government sets the maximum amount a Canadian can deposit into a TFSA each year. From 2019 to 2022, the maximum annual limit has been $6,000. In 2023, it was $6,500 and the new contribution limit for 2024 is $7,000. 

Unused contributions can be carried over to future years. So, if you have never contributed to a TFSA, your lifetime limit as of 2024 is $95,000 (or less, depending on your age). That means you could contribute $95,000 today. But next year, your maximum contribution limit would drop back down to $7,000 because you used up all your unused contribution room this year.

Which one should I choose: TFSA or RRSP?

Which is better, the RRSP or the TFSA? That is a tricky question as both have undeniable benefits. Also, both have the same purpose. However, there are some key differences that make one account a better choice than the other depending on your situation.

Short term vs long term

Withdrawing funds from a TFSA has no tax implications. So, a TFSA is ideal for short-term savers. If you’re planning on buying a car in 2 years, you can use a TFSA to save money and withdraw when needed. On the other hand, withdrawing funds from an RRSP can have tax implications making it more ideal for long-term savers whose primary intent is to save money for their retirement. When you withdraw from a TFSA, you get that contribution room back the following year. When you withdraw from your RRSP, you lose that contribution room forever, unless it’s under the HBP and LLP.

One can use a TFSA for long term goals and save for retirement. However, the money is easily accessible. It might be hard to resist the temptation of withdrawing funds. It all comes to your level of discipline at the end of the day.

The tax advantages of the RRSP does not benefit everyone equally. Generally, the RRSP is better suited to high-income earners who will save more on income. Generally, the TFSA is better suited to lower income earners, since they are already taxed at a lower rate. A popular strategy for younger people, and those new in their careers, is to invest within a TFSA during their low income years and save their RRSP contribution room for the future during their high income years.

Anticipated Income at retirement

RRSPs are better than TFSAs if you anticipate that your income at retirement will be considerably lower than your current income. Though the TFSA shelters your investment income from taxes, it does not match the advantage of deferring your income tax for later. In addition, if you reinvest the refund you get following an RRSP contribution, you can increase your savings even more.

Assume you contribute $5,000 to your RRSP each year and your marginal tax rate is 30%. Following your first contribution, you will receive a refund of $1,500. You can reinvest that refund in your RRSP so it can start earning investment income.

In year 2, you contribute another $5,000. But since you have reinvested the $1,500, your total contribution for year two would be $6,500. At your marginal tax rate, you will be receiving a refund for your second year of $1,950!

All in one solutions for self directed RRSPs

If you are new to investing, you should consider Robo-advisor services or All-in-one ETFs. Both offer you a diversified portfolio based on your risk tolerance. Your investments are diversified across various sectors, asset categories, and locations. It’s straightforward and requires less effort than picking your investments independently. The hands-off approach offered by these solutions make them quite popular with investors.

• Robo-advisors: are automated investment services offered by a multitude of financial institutions and discount brokers. All you have to do is answer a questionnaire to determine your risk profile. Once that is done, you will be offered a fully diversified portfolio of investments that fits your risk tolerance.
• All in one ETFs: are exchange-traded funds that invest in a basket of ETFs to offer investors exposure to a diversified portfolio. Owning one All-In-One ETF is sufficient enough to build your portfolio.

What happens to your RRSP when you retire?

You’ve been contributing to your RRSP for years, and it’s finally time to retire. Now what? You have two options:

The most common option is to convert your RRSP to a Registered Retirement Income Fund (RRIF).  A RRIF account functions as an annuity contract. Instead of emptying your RRSP in full, you would receive a predetermined flow of income. The income received is taxable. You can set up a RRIF account with the help of your financial institution or advisor. The RRIF is similar to an RRSP because the income generated within the RRIF is tax-sheltered until you withdraw it.

The second possibility is to withdraw your funds in full. You would receive a lump sum amount that will be added to your income for the year in which you made the withdrawal. The CRA will tax the amount at your marginal tax rate.

Finally, you have the option to purchase an annuity. An annuity offers a guaranteed income for life or for a certain period. The RRSP issuer will not withhold tax on the funds used to purchase an annuity. However, payments can be subject to taxes.

Please note that your financial institution is obligated to close your RRSP by the end of the year you turn 71. You will have to settle on one of the three options discussed above.