What is an RRSP and how does it work?
A Registered Retirement Savings PlanRegistered Retirement Savings Plan A plan that lets you save for retirement while lowering your income taxes. You choose how you want to invest your savings. You don’t pay tax on any money in your account until you take it out.+ read full definition can help you save for retirement. Before March taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition filing time, there is often a rush to buy RRSPs. That’s because RRSPs can offer tax advantages. And the earlier you start saving for your retirement, the better. A longer time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition and compound interest make investing early for your retirement a good idea.
Learn more about RRSPs and how they work.
On this page we answer
- What is an RRSP?
- Why should you use an RRSP to save for retirement?
- How much can you contribute to your RRSP?
- What can you hold in your RRSP?
- What are the different types of RRSPs?
- What are self-directed RRSPs?
- What fees will you pay for your RRSP?
What is an RRSP?
A Registered Retirement Savings Plan (RRSPRRSP See Registered Retirement Savings Plan.+ read full definition) is a kind of savings plan designed to help you save for retirement. Along with saving for retirement, RRSPs have special tax advantages and benefits that can help you before you retire. Anyone who files an income taxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition return and has earned income can open and contribute to an RRSP.
There are many places where you can open an RRSP:
- 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 fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition companies
- InvestmentInvestment An item of value you buy to get income or to grow in value.+ read full definition 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
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.
Watch our video: What is an RRSP?
Why should you use an RRSP to save for retirement?
There are many advantages to saving for retirement using an RRSP. It provides advantages that a savings accountSavings account A bank account intended for depositing funds. Pays interest and lets you withdraw cash at any time.+ read full definition doesn’t, including:
1. Your contributions are tax deductible. Your RRSP contributions reduce your taxable incomeTaxable income The amount of income you have to pay tax on, after tax credits and deductions.+ read full definition. That means you may owe less at tax time or get a larger refund. You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
2. Your savings grows tax-freeTax-free Money that you do not pay tax on.+ read full definition while in the plan. Any interest or investment earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition you make from the money in your RRSP is not taxed if it stays in the plan.
3. Deferral of taxes on your income. Because your RRSP contributions are made with pre-tax dollars, you won’t pay tax on that money until you withdraw it from the plan. That includes both your investment earnings and your contributions.
For most Canadians with moderate to high incomes, it’s likely that your marginal tax rateMarginal tax rate The amount of tax that you have to pay on each extra dollar of income you make. As your income rises, so does your tax rate.+ read full definition will be lower in retirement than during your contributing years. For this reason, you’re likely to pay less tax on the income when you withdraw it, than you would have during your working years.
4. You can convert your RRSP to get regular payments when you retire. You can transfer your RRSP savings tax free into a Registered Retirement Income FundRegistered Retirement Income Fund A plan that holds your retirement savings and provides income after you retire. It works like an RRSP in reverse because you withdraw money instead of saving. There are rules about how much you can withdraw each year.+ read full definition (RRIF) or an annuity when you retire. You’ll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracketTax bracket The rate at which you pay tax, based on your income level.+ read full definition in retirement, you’ll pay less tax.
5. A spousal RRSPSpousal RRSP An RRSP for spouses or life partners where the higher earner puts money into a plan in their spouse’s name. The spouse can use the funds after a certain time period. You use it to split income in retirement, which lowers the tax you have to pay.+ read full definition can reduce your combined tax burden. If you earn more money than your spouse, you can help build their tax-free savings by contributing to a spousal RRSP. Retirement income will then be split more equally between the two of you. This may reduce the total amount of tax you pay.
6. You can borrow from your RRSP to buy your first home or pay for your education. You can take out up to $35,000 for a down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.
How much can you contribute to you RRSP?
There are limits on how much you can contribute to your RRSP each year.
You can contribute the lower of:
- 18% of your income in the previous year, or
- the maximum contributionContribution Money that you put into a savings or investment plan.+ read full definition amount for tax year.
You can check your RRSP contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition in your CRA MyAccount, along with information about your TFSATFSA See Tax-Free Savings Account.+ read full definition contribution room and Notice of Assessment. You receive this Notice of Assessment after you file your tax return.
If you don’t have the money to contribute in one year, you can carry forward your RRSP contribution room and use it in the future. If you are a member of a pensionPension A steady income you get after you retire. Some pensions pay you a fixed amount for life. Others save up money for you while you are working. You use that money to create income after you retire.+ read full definition plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
Try our RRSP savings calculator to estimate how much your plan will be worth at retirement and how much income it will provide each year.
Both RRSPs and Tax-free Savings Accounts (TFSAs) can be used to save for retirement.
If you are in a lower income bracket, it may be more useful to start saving in a TFSA.
Consider the differences between a TFSA and an RRSP.
What can you hold in your RRSP?
Like other registered savings plans, RRSPs can hold savings deposits and investments.
Qualified investments – allowed to be held in an RRSP – include cash, gold, GICs, bonds, mutual funds, ETFs, and more.
Investments that cannot be held in an RRSP include precious metals, commodityCommodity A raw material that trades in large amounts on a stock exchange. For example, grain, gold, and oil.+ read full definition futuresFutures A derivative contract that commits you to buy or sell a commodity, currency or stock market index at a set price on a set date in the future. Unlike an option, you can’t change your mind later; you must do what your contract says you will do.+ read full definition contracts, real estateEstate The total sum of money and property you leave behind when you die.+ read full definition, and other prohibited investments.
Learn more about the rules for contributing to an RRSP.
UNDERSTAND THE RISKS
The value of your RRSP may go down or up depending on the investments it holds. Learn more about investment risks.
Consider the tax implications of where you hold your investments. If you have both registered and non-registered accounts for investing, consider using your RRSP to hold investments that are taxed at a higher rate, such as GICs and bonds. Investments taxed at a lower rate – such as those that generate dividends – could go in your non-registered accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition.
Learn more about how investments are taxed.
What are the different types of RRSPs?
There are three main types of RRSPs. While an individual RRSP is the most common, the other optionsOptions An investment that gives you the right to buy or sell it at a set price by a set date. The buy right is termed a “call” option, and the sell right is termed a “put” option. You buy options on a stock exchange.+ read full definition, spousal or group, may also appeal to you.
1. Individual RRSP
An individual RRSP is an account that is registered in your name. The investments held in the RRSP, and the tax advantages associated with them belong to you. You can choose to build and manage your RRSP investment portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition yourself with a self-directed RRSPSelf-directed RRSP A retirement savings plan that lets you choose from a wide range of investments. You can choose from a wide range of investments or work with an advisor. There are rules about how much you can save each year, and you don’t pay tax on the money that stays in your plan.+ read full definition or work with an advisor.
2. Spousal RRSP
A spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the RRSP, but you contribute to it. You get the tax deductionTax deduction A cost that you can deduct from your income when you file your taxes. This lowers the tax that you owe. For example, if you contribute $5,000 to your RRSP, you can deduct $5,000 from your income when you file your taxes.+ read full definition for any contributions you make to a spousal RRSP. Any contributions you make reduce your own RRSP deduction limitDeduction limit The most you can deduct for your RRSP contribution on your income tax return. Any money that you put into a pension plan at work counts as part of your RRSP contribution.+ read full definition for the year. They won’t affect how much your spouse can contribute to their own RRSP.
A spousal RRSP is a way for you and your spouse to split your income more evenly in retirement. That means the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. You may want to do this if you earn more money than your spouse and you’re likely to be in a higher tax bracket when you both retire. Or if you have a pension plan and your spouse doesn’t.
To qualify for a spousal RRSP, you must:
- have lived together as a couple for at least 12 months,
- have a child together by birth or adoption, or
- shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition custody and support of your partner’s children from a previous relationship.
If your spouse takes out money you have contributed:
- within three years of the contribution date — you’ll have to pay tax on the withdrawal amount
- three years after the contribution date — your spouse will pay tax on the withdrawal amount.
If your relationship ends:
- if you are married — spouses generally must divide assets equally
- if you are living common-law — consider drafting a joint agreement to cover this situation as assets may not necessarily have to be divided equally.
Spousal RRSPs are used to equalize retirement income and minimize tax. It doesn’t make sense to open a spousal RRSP if your spouse’s income will be roughly equal to yours when you retire.
3. Group RRSP
Some employers offer group RRSPs as a benefitBenefit Money, goods, or services that you get from your workplace or from a government program such as the Canada Pension Plan.+ read full definition to help employees save for retirement. You open an individual RRSP, but you contribute to it through your employer. The RRSPs of all of the employees are held at the same financial institution. Here’s how it works:
- Your plan contributions are usually automatically deducted from your pay. Your employer may match or add to your contributions.
- Your employer usually pays the costs of opening and managing the plan. You pay any investment costs.
- The range of investment options is usually limited, depending on where the group RRSP is held.
- The rules for when and how much money you can take out of the plan vary depending on your employer.
It’s important to understand how your group RRSP works. The choices and rules vary depending on your employer and where the plan is held. Learn more about group RRSPs.
What are self-directed RRSPs?
A self-directed RRSP account allows you to play a more active role in choosing and managing the investments in an individual or spousal RRSP.
Self-directed RRSPs are available at investment firms — both full-service and discount brokerageDiscount brokerage A brokerage firm that charges lower fees to buy and sell investments, as opposed to a full-service brokerage. Does not provide investment advice.+ read full definition firms. You can hold many different types of investments in a single self-directed plan. This makes it easier to keep track of your investments and maintain your desired asset mixAsset mix The percentage distribution of assets in a portfolio among the three major asset classes: cash and cash equivalents, fixed income and equities.+ read full definition.
A self-directed RRSP may be suitable if you:
- want access to a broad range of investment options.
- are a knowledgeable investor.
- have time to manage your investments.
As with any account, learn about all the fees for opening and managing your self-directed RRSP. You may pay a set-up fee, an annual trusteeTrustee A person or company that you appoint to manage the assets of a trust. You can name more than one trustee.+ read full definition fee, and sales charges or commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition for buying and selling investments. You may also pay a fee for investment advice or for managing your investments. Commissions are likely to be lower at a discountDiscount When something sells for less than its normal price.+ read full definition brokerage, but you’ll need to be comfortable making investment decisions on your own.
DO YOU NEED INVESTMENT ADVICE?
If you’d like advice on how to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition and manage your RRSP savings, open an account with a full-service brokerage. If you don’t need advice, set up your RRSP account with a discount brokerage and lower the fees you pay. Learn more about getting advice.
What fees will you pay for your RRSP?
Fees for RRSPs vary widely. What you pay depends on where you open your RRSP account and how you invest your savings. There are four main types of fees you might be charged:
1. Opening an account – There is usually no charge to open an RRSP account. Some institutions may charge a small set-up fee.
2. Annual administration or trustee fee – The annual fees for RRSPs can vary. If you have a group RRSP, your company may cover this cost for its employees. Make sure you understand what these fees are before you open an account.
3. Investment costs – You pay a commission when you buy and sell stocks and ETFs for your plan. You may pay a sales charge when you buy mutual funds for your plan, or when you sell them. You’re also charged a management expense ratio (MER) if you hold mutual funds or ETFs.
4. Other costs – Most plans charge fees for certain services. This could include a fee for transferring money to another RRSP or closing the RRSP.
Ask your financial institution if they will waive the annual feeAnnual fee A fee that is charged on an annual basis. One common occurrence of an annual fee is the fee charged by credit cards.+ read full definition. They may agree to do this if you hold other accounts there or if you have enough savings in your plan.
When choosing an RRSP, find out what the fees are, specifically for opening, administering, transferring money, or closing the RRSP. Don’t be caught by surprise later if you need to make a change.
A Registered Retirement Savings Plan (RRSP) is a savings plan designed to help you save for retirement.
- Anyone with earned income, who files a tax return, can open an RRSP.
- You can get an individual, spousal or group RRSP.
- Your RRSP contribution room carries forward if you do not use it all each year.
- You can hold investments and savings in an RRSP. Your savings grow tax free while your money is in the plan.
- You can have an RRSP, and other savings plans such as TFSAs.
- When you retire, your RRSP can be transferred to a RRIFRRIF See Registered Retirement Income Fund.+ read full definition or an annuityAnnuity A contract usually sold by life insurance companies that guarantees an income to you or your beneficiary at some time in the future. An annuity is a contract with a life insurance company. When you buy an annuity, you deposit a lump sum of money, and the insurance company agrees to pay you a guaranteed…+ read full definition.