How RRSPs work
3 tax advantages
- TaxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-deductible contributions – You get immediate tax relief by deducting your RRSPRRSP See Registered Retirement Savings Plan.+ read full definition contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
- Tax-sheltered earningsEarnings For companies, its the money they make and share with their shareholders. For investors, its the money they make from their investments.+ read full definition – The money you make on your RRSP investments is not taxed as long as it stays in the plan.
- Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.
How much you can contribute
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:
- 18% of your earned income in the previous year, or
- the maximum contribution amount for the current tax year: $25,370 for 2016.
If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
You can carry forward unused contributions
If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future. Learn more about how RRSPs work.
Investments you can hold in an RRSP
Investments that can be held in an RRSP are called qualified investments. They include:
- Gold and silver bars
- Savings bonds
- Treasury bills (T-bills)
- Bonds (including government bonds, corporate bonds and strip bonds)
- Mutual funds (only RRSP-eligible ones)
- Equities (both Canadian and foreign stocks)
- Canadian mortgages
- Mortgage-backed securities, and
- Income trusts
Investments you can’t hold in an RRSP
- Precious metals
- Personal property such as art, antiques and gems
- Commodity futures contracts
As of March 22, 2011, you also can’t hold any of the following investments in your RRSP:
- Prohibited investments – Examples: debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition you hold, investments in entities in which you hold an interest of 10% or more.
- Non-qualified investments – Examples: shares in private holding companies, foreign private companies and real estateEstate The total sum of money and property you leave behind when you die.+ read full definition.
If you buy these investments for your RRSP, you will be charged a tax equal to 50% of their fair market valueMarket value The value of an investment on the statement date. The market value tells you what your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition. You may apply for a refund if you dispose of the investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition from your RRSP by the end of the year after the year the tax applied. Learn more about these rules.
Understand the risks
The value of your RRSP may go down as well as up, depending on the investments it holds. Learn more about investment risks.
How long your RRSP can stay open
Where to open an RRSP account
- Banks and trustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets until the beneficiary reaches legal age.+ read full definition companies
- Credit unions and caisses populaires
- Mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the funds goals for risk and return. You can redeem your fund units at any time.+ read full definition companies
- Investment firms (for self-directed RRSPs)
- Life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition companies
RRSP or TFSATFSA See Tax-Free Savings Account.+ read full definition?
Both offer tax advantages. Learn how they differ by reading Comparing TFSAs and RRSPs.
Use this RRSP calculator to figure out how much you need to save for retirement.
2 key points
You can open an RRSP at any age as long as you have earned income and file a tax return.
You must close your RRSP when you turn 71.