What is an Registered Retirement Savings Plan (RRSP)?

A Registered Retirement Savings Plan (RRSP) is a savings plan registered with the Canadian federal government employees contribute to for retirement.

In an RRSP, the employee’s spouse or common-law partner can contribute to the plan. Any income employees earn in the RRSP is usually exempt from taxes as long as the funds stay in the plan.

When employees contribute money to an RRSP, their funds are “tax-advantaged”, or exempt from being taxed in the year they contributed that amount. Any investment income earned from investments within the RRSP can be tax-deferred, as long as the money stays in the RRSP until it’s withdrawn. RRSP contributions are tax-deductible.

How do RRSPs work?

Anyone who files an income tax return and earns income can open an RRSP. Employees can open RRSPs in:

• Banks and trust companies
• Credit unions
• Mutual fund companies
• Investment firms
• Life insurance companies

Anyone can open an RRSP at any age as long as they have earned income and file a tax return. All citizens need to close their RRSP when they turn 71.

Why should employees contribute to an RRSP?

There are several advantages to using an RRSP to save for retirement, including:

• Contributions are tax deductible and RRSP contributions reduce taxable income.
• Savings grow tax-free as long as the money stays in the plan.
• Citizens can defer taxes on their income until withdrawing it from the plan.
• Anyone can convert their RRSP to receive regular payments upon retiring.
• A spousal RRSP can reduce the combined tax burden. The higher-earning spouse can build their tax-free savings in the spousal RRSP. Retirement income will then be split more equally between the couple.
• Citizens can borrow from their RRSP to buy their first home or pay for their education.

How much can someone contribute to their RRSP?

Canada limits how much a person can contribute to their RRSP each year. Citizens can contribute 18% of their income in the previous year or the maximum contribution amount for the tax year.