Understanding RRSPs

Many Canadians are looking ahead to the longest retirement in history. These days, it’s not impossible or uncommon to live 30 years past the typical age-65 retirement. And for many Canadians, the question that’s top of mind is, “will I have enough?”

One of the easiest ways to save for your post-career years is a Registered Retirement Savings Plan (RRSP). Contributions are tax-deductible and the income you earn on investments in your RRSP is tax-deferred until you withdraw it, allowing your savings to multiply even faster.

Contributing to Your RRSP

The Government of Canada sets limits on contributions to RRSPs. Your maximum allowable RRSP contribution is 18% of your previous year's income, less any pension adjustments, up to a maximum dollar limit for the tax year. For 2020, the dollar limit is $27,230. You can contribute any time during the current year or in the first 60 days of the following year. Check your contribution limit any time by visiting My Account or MyCRA on the Canada Revenue Agency website.

The Benefits of RRSP accounts

Tax savings – Contributions to an RRSP are tax-deductible, up to your RRSP deduction limit for the year. You can also carry forward any unused contribution room to “catch up” in future years.

Tax-deferred growth – You can build and manage your RRSP with different types of qualified investments: stocks, bonds, options, mutual funds, exchange-traded funds (ETFs), savings deposits, treasury bills and guaranteed investment certificates (GICs). You aren’t taxed on your investment growth until you withdraw the money in retirement. By this time, you’ll likely be in a lower income bracket and taxed at a lower rate.

Income splitting – A spousal RRSP can be useful if you expect your spouse's retirement income to be lower than yours. By directing part of your annual contribution into a spousal RRSP, you can build a separate retirement fund for your spouse and benefit from a tax deduction now. Each year, you can split your allowable contributions between your RRSP and a separate spousal RRSP set up for your spouse. You then receive the same deduction as if you were contributing to a single RRSP.

Taxation and types of accounts

In Canada, each kind of income is taxed differently. Because dividends and capital gains are taxed at a lower rate than employment income or interest income, how you divide investments between your taxable and registered accounts can impact your taxes owing.

The following table demonstrates how each type of investment income — interest income, eligible dividends, and capital gains — is taxed differently in a non-registered account. These calculations use the highest marginal tax bracket for an Ontario resident in 2020.

	Interest	Eligible Canadian dividends	Capital gains
Gross capital gain			$1,000.00
Included in income	$1,000.00	$1,000.00	$500.00
Gross up (at 38%)		$380.00
Total included in income	$1,000.00	$1,380.00	$500.00
Federal taxes	$330.00	$455.40	$165.00
Less federal dividend tax credit		($207.27)
Provincial tax (after provincial dividend tax credit)	$205.30	$145.31	$102.65
Total tax	$535.30	$393.44	$267.65
After-tax amount	$464.70	$606.56	$732.35
Marginal tax rate	53.53%	39.34%	26.77%

Withdrawal Plans for Special Circumstances

If you choose to withdraw funds from your RRSP, the withdrawal will be treated as income and taxed at your marginal rate. There are, however, two exceptions that allow you to temporarily withdraw funds, interest-free:

Borrowing to buy a home – The Home Buyers' Plan (HBP) allows you to withdraw up to $35,000 from your RRSP ($70,000 for a couple) to buy or build your first home, and repay the withdrawal over time. You are considered a first time home buyer if you or your spouse have not owned and principally occupied a home in the past four years. You generally have 15 years to repay withdrawals to your RRSP.

Borrowing to go back to school – Your RRSP can also be used to fund either your or your spouse/common-law partner’s education under the Lifelong Learning Plan (LLP). You can withdraw up to a total of $20,000 from your RRSPs – up to $10,000 in a calendar year and $20,000 total. There is no limit on the number of times you can participate in the plan over your lifetime, but all funds must be paid back within 10 years.

To open an RRSP

Ready to open a self-directed registered retirement savings plan (an RRSP)? Great! Click here to access the online application.

Preparing for retirement? Learn about tax efficiencies.

Have questions? Please check out RRSP FAQs for help. 

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.