Saving up for retirement is crucial for your future financial stability and the earlier you start, the better. The longer you spend saving, the more you can harness the power of compounding growth and retire sooner.
A Registered Retirement Savings Plan (RRSP) helps you do just that. It’s a savings plan registered with the Canadian government to assist you in setting aside money for retirement.
The primary perk of an RRSP lies in its tax benefits. Still, there are a few aspects you need to consider before setting up your RRSP.
Let’s take a closer look at the RRSP, its benefits and drawbacks, potential investment options, and contribution limits.
What is an RRSP?
The foundation of any secure retirement begins with a solid savings strategy to build a strong financial security net. That’s exactly where a registered retirement savings plan can make all the difference.
An RRSP is a savings plan for employees and self-employed individuals in Canada. Registered with the Canada Revenue Agency (CRA), an RRSP allows you to build your retirement fund while leveraging the compounding growth of your contributions. It’s a trusted and secure investment vehicle used by millions of Canadians to plan for their future.
Your RRSP contributions are tax-deductible. This means the funds you put into your account are subtracted from your taxable income, potentially lowering your annual tax bill. Additionally, any income earned from your investments can grow in your registered retirement savings plan without the need to pay taxes for as long as the money stays in your account. This tax-deferred accumulation of funds is what makes an RRSP such an attractive savings option.
Please note that the growth of your RRSP contributions depends on interest rates and the duration of your investment.
How Does an RRSP Work?
An RRSP operates as a savings account. Your annual contribution limit depends on the income you reported the previous year, typically capped at 18% of your earnings.
Suppose your previous year’s reported income is $80,000. With an 18% RRSP contribution limit, you can deposit up to $14,400 to your account. If you contribute the full $14,400, the Canada Revenue Agency will calculate your taxes on $65,600 instead of $80,000.
An important thing to consider here is that your RRSP contributions are tax-deferred but not tax-free. It’s true that while the money sits in your account, it accumulates interest tax-free. However, when the time comes to withdraw the funds, you’ll pay taxes according to the terms you negotiated.
Are There RRSP Fees?
Before committing to an RRSP, learn about the fees associated with setting up your account and making financial transactions. Understanding what you’re signing up for means being ready to handle additional costs, should they arise.
While the terms and conditions tend to differ across individual cases, in general, four main types of fees apply to your account:
Set-up fee: Opening an account is usually free. However, some financial institutions might charge a small set-up fee.
Yearly administrative fee: Annual RRSP administration fees can vary across financial institutions and account types. For example, if you have a group RRSP through your employer, the company is likely to cover the administrative costs. However, with an individual RRSP account, you might be required to pay annual administration fees. If you choose a credit union to invest with, there are no annual fees.
Investment expenses: If you invest with a broker, the purchase of some types of investments comes with a commission. For example, if you buy or sell stocks within your plan, you might have to pay a commission. You might also pay a sales charge when you purchase or sell mutual funds for your savings plan. If you choose an RRSP from a credit union, there are no investment expenses.
Other costs: Depending on the type of your RRSP, you may be charged for transferring money from your RRSP to a registered retirement income fund or closing your registered retirement savings plan before the negotiated term.
How Much Should You Contribute to Your RRSP?
The amount of your RRSP contributions depends on several factors: general RRSP rules, account-specific requirements, and personal financial goals.
For most account holders, the maximum contribution room is 18% of their previous year’s reported income. However, the Canada Revenue Agency sets a general RRSP contribution limit for the year. In 2025, it’s expected to be $32,490. While these numbers mark the highest possible amounts you’ll be eligible to put into your account, they aren’t a single determining factor.
It’s critical to assess your financial priorities and ensure you distribute your money carefully toward reducing debt and creating a solid emergency fund. While saving for retirement is a must to secure financial stability, the decision of how much to contribute to your RRSP should be well thought out.
The best contribution strategy should account for your financial circumstances and objectives. It’s also always a good idea to consult the experts at your financial institution, be it a bank or a credit union, to work out the best approach to managing your RRSP.
RRSP Options
We offer multiple RRSP options to help you achieve your retirement goals while maximizing tax benefits.
RRSP Savings Account: For those starting to save, this account has no minimum deposit requirement and no monthly fees. Interest is calculated daily and paid monthly.
1-Year Redeemable RRSP: This plan offers flexibility with no redemption penalties, allowing additional deposits in any amount at any time. Interest is paid annually or at maturity, with a minimum deposit requirement of $1,000.
1 to 5-Year Non-Redeemable RRSP: Suitable for those seeking higher returns, this option requires a minimum deposit of $1,000, with interest paid annually or at maturity.
1-Year Easy Start Non-Redeemable RRSP: Ideal for new savers, this plan allows you to start with as little as $5 through pre-authorized transfers, aiming for a $1,000 balance by maturity.
3-Year Convertible Non-Redeemable RRSP: This option provides the opportunity to convert to an equal or longer-term investment once during the term, allowing you to take advantage of potential rate increases. A minimum deposit of $1,000 is required.
Laddering Strateg:. Dividing your investment into multiple terms ranging from 1 to 5 years (minimum $1,000 each) offers annual access to a portion of your funds as each term matures. You also take advantage of the higher interest rates the longer investment terms offer.
Benefits of an RRSP
Investing in an RRSP is beneficial for several reasons:
Tax-deferred savings: Any investment income can grow in your registered retirement savings plan without being taxed for as long as the money stays in your account.
Tax-deductible contributions: The money you put into your RRSP can be deducted from your taxable income, which may lower the amount of tax you owe or even move you into a lower tax bracket.
Compounding growth: As your RRSP contributions accumulate, you can build your retirement fund while leveraging the compounding growth of your savings. You’re earning interest on your interest tax-free!
No minimum age limit for account holders: Unlike other savings accounts that often come with strict eligibility criteria, an RRSP doesn’t have minimum age requirements. That is, if you’re 71 or younger and employed, you can start saving for retirement with an RRSP.
Availability of account types and options: You can contribute to an individual or a spousal RRSP (if you have a spouse or common-law partner). Additionally, you can choose from 1-year redeemable, 1 to 5-year non-redeemable, Easy Start and other options, depending on your needs.
Limitations of an RRSP
Though opening an RRSP is a sound strategy to secure a safe retirement, there are a few limitations any potential account holder should be aware of:
Upper age limit: Once you turn 72, you’ll have to withdraw money at a set withdrawal rate, regardless of whether you need it.
Tax on the investment income upon withdrawal: While your funds remain in the RRSP account, they accumulate interest on a tax-free basis. However, when you make withdrawals, you must pay income taxes per negotiated terms.
Income-based contribution limit: Your RRSP contribution limit depends on the income you reported the previous year. Generally, you can contribute up to 18% of your annual earnings.
Penalty for excess contribution:. Contributions exceeding the set maximum are subject to penalties. The applied fees could potentially weaken the tax benefits of your RRSP account. Ensure you fully understand the contribution limits of your RRSP to avoid unnecessary charges.
Withdrawal from an RRSP
The opportunity to save your funds on a tax-deferred basis might blur the RRSP vs TFSA lines for some. However, a major difference lies in withdrawing your savings.
With a TFSA, you can cash out whenever you want and how much you want without any tax implications. This is not the case with an RRSP.
While RRSP contributions aren’t taxed, the withdrawals are. Once you take your savings out, you must pay taxes at the marginal tax rate for that year. Your marginal tax rate is the percentage of tax you pay on each additional dollar of income, based on your total earnings.
Also, if you’re under 71, an additional withholding tax on the funds you withdraw applies. In Canada, this rate varies depending on the withdrawn amount and the province where you live.
However, there are two exceptions: the Home Buyers’ Plan and the Lifelong Learning Plan. Withdrawals made under these programs are tax-free, which allows you to access your savings to make a down payment on your home or pursue education without sabotaging your investment gains.
Remember, early withdrawals can undermine the power of compounding growth.
RRSP Contribution Deadline for 2025 Tax Year
You can make contributions at any time throughout the year or within the first 60 days of the following year. However, the contributions made during this 60-day window will be subtracted from your income for the previous year.
For the 2025 tax year, the contribution deadline is March 2, 2026. This is your last chance to make a tax-deductible contribution for 2025.
Conclusion
A registered retirement savings plan (RRSP) is a solid savings strategy that helps you retire earlier. Available to employees and self-employed individuals in Canada, an RRSP offers multiple benefits, such as tax-deferred savings and tax-deductible contributions.
Contributing regularly to an RRSP account means you can strengthen your savings plan by leveraging the power of compounding growth. That’s why millions of Canadians see RRSPs as a trusted investment vehicle to secure their future financial stability.
Interested in investing in an RRSP? Give us a call with any questions you have or get started with your online application today!