Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged investment account designed for retirement savings in Canada. Established in 1965, it aims to help Canadians accumulate funds for their post-employment years. RRSPs offer various types, including individual plans, spousal plans, group plans through employers, and pooled plans for self-employed individuals. Contributions to an RRSP can be deducted from taxable income, allowing for tax savings while the funds remain invested. However, withdrawals made before retirement are subject to heavy taxation, although there are specific programs, like the First Time Home Buyers' Plan and the Lifelong Learning Plan, that allow for penalty-free access under certain conditions.
Individuals can open an RRSP at various financial institutions, and the account must be converted to a registered retirement income fund (RRIF) by the end of the year in which the account holder turns seventy-one. Investments held within an RRSP can include a range of assets such as stocks, bonds, and mutual funds. Overall, RRSPs play a significant role in the retirement planning landscape for Canadians, providing an effective means to save for the future while benefiting from tax incentives.
On this Page
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan (RRSP) is an investment account for retirement used in Canada. An RRSP is a vehicle that helps Canadians save more money to live on when they retire from their jobs. RRSPs are just one of many types of retirement investment plans that Canadians can choose from. However, many Canadians choose to use RRSPs to save for retirement because they have some tax benefits. Different types of RRSPs exist, depending on the number of people involved in the plans. Those who invest in these plans must eventually change them over to a different type of investment. RRSPs have some similarities to 401(k) retirement plans in the United States.
Background
Retirement funds are used to help people pay for everyday expenses after they leave the workforce. The Canadian government introduced the RRSP as a type of retirement fund in 1965 to help Canadians save for their lives after they finished working. However, many other types of retirement funds exist in Canada. In 2009, the Canadian government introduced the tax-free savings account (TFSA), which was meant to provide an alternative way to save money in addition to registered retirement savings plans (RRSPs).
Overview
There are several types of RRSPs. The first is the individual plan, in which one person owns and contributes to the plan. The person can open the fund at a bank or other financial institution. Another type of plan includes a person’s spouse. A Spousal RRSP provides benefits for an individual and that person’s spouse. A Group RRSP is coordinated by an employer and is often paid for with payroll deductions. A Pooled RRSP is a fund that can be started by people who are self-employed or small business employees. All RRSPs are registered with the Canadian government. RRSPs grow in value based on the stocks or other investments that comprise it. When the value of the stocks rise, the value of the RRSP also rises. A self-directed RRSP is one in which the owner of the plan manages the money and assets in the plan. Although people can choose to create self-directed plans, often people who own RRSPs own them through their employers or have them managed by another group.
Canadians who want to take part in an RRSP can go to any financial institution—including a bank, a credit union, or a trust company—or work through a financial adviser to set up the RRSP account. Individuals who start these accounts are required to have a social insurance number. People who set up accounts from themselves must be eighteen years old or older, but minors can set up accounts if they have letters of consent from parents or legal guardians. People can also set up an RRSP account with their spouses or common-law partners. An RRSP lasts only until the end of the calendar year in which the account holder turns seventy-one. At that time, the RRSP can be converted into a Registered Retirement Savings Plan (RRIF), used to purchase an annuity, or the cash can be withdrawn from the account.
An RRSP is a tax-sheltered plan, which means that a user does not have to pay taxes on income earned through the investment as long as that money stays in the investment. This is different from money gained by investment in a regular stock market fund. For example, imagine a person invests in Stock A with both a regular cash investment fund and an RRSP. Stock A rises in value by $50. The person has gained $50 in both the cash investment fund and the RRSP. However, the person will have to pay taxes only on the $50 gained in the cash investment fund and not on the $50 in the RRSP as long as they do not withdraw money from the RRSP. When users eventually take money out of RRSPs, they will have to pay the taxes on the income. However, people who are in retirement are generally in lower tax brackets, which means they pay a decreased percentage of their income in taxes. So, people who invest in RRSPs will save money on taxes as long as they keep the money invested in the fund until they retire.
RRSPs can include investments such as stocks, bonds, mutual funds, exchange-traded funds, segregated funds, and cash deposits. Canadians can also include unlimited foreign investments in their RRSPs. RRSPs also help save investors money on taxes because people can deduct their contributions. Each year, Canadians saving for retirement can contribute up to a certain dollar amount to their funds. Generally, people choose to have the money they invest in the plans deducted directly from their income. Individuals can also fund their RRSPs by transferring funds from other types of accounts, such as registered pension plans (RPP), registered retirement income funds (RRIF), specified pension plans (SPP), deferred profit-sharing plans (DPSP), or pooled registered pension plans (PRPP).
People who withdraw from an RRSP before retirement are taxed heavily, between 10 and 30 percent, depending on the amount withdrawn. The government implements heavy taxation on RRSP funds to discourage people from taking out money before retirement. Although withdrawing before retirement is generally frowned upon, there are some instances under which Canadians can withdraw before retirement and still avoid penalties. People can use money from the RRSP to buy a first home using the Home Buyers’ Plan. It allows people to use a maximum of $35,000 of the fund tax-free, but they must repay the RRSP within fifteen years. People can also take out $10,000 every year from their RRSP to fund school as part of the Lifelong Learning Plan. Though this withdrawal can be used for spouses and domestic partners, the plan does not allow parents to fund their child's education. The lifetime limit for withdraws under the Lifelong Learning Plan is twice per person, meaning an individual may withdraw $20,000 before age seventy-one, and a couple can withdraw $40,000. This amount must be paid back in ten years to remain tax-free.
Bibliography
Kagan, Julia. “Registered Retirement Savings Plan (RRSP): Definition and Types.” Investopedia, 28 Oct. 2024, www.investopedia.com/terms/r/rrsp.asp. Accessed 9 Jan. 2025.
"Making RRSP Withdrawals before and after You Retire." Get Smarter about Money, Ontario Securities Commission, 14 May 2024, www.getsmarteraboutmoney.ca/learning-path/rrsps/making-rrsp-withdrawals-before-and-after-you-retire. Accessed 9 Jan. 2025.
“Registered Retirement Savings Plan (RRSP).” Canada Revenue Agency, 2 Jan. 2025, www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html. Accessed 9 Jan. 2025.
“Registered Retirement Savings Plan (RRSP).” RBC, www.rbcroyalbank.com/investments/rrsp.html. Accessed 9 Jan. 2025.
“RPP vs RRSP: Contribution Limits & Tax Implications.” TurboTax Canada, 10 Nov. 2022, turbotax.intuit.ca/tips/how-do-registered-retirement-savings-plans-work-5526. Accessed 9 Jan. 2025.
“RRSP Basics for Canadians.” Dummies, www.dummies.com/personal-finance/rrsp-basics-for-canadians. Accessed 9 Jan. 2025.
"RRSP Withdrawal Rules: All You Need to Know." TurboTax Canada, 23 June 2023, turbotax.intuit.ca/tips/how-to-withdraw-retirement-savings-plans-in-canada-5550. Accessed 9 Jan. 2025.
“Savings and Pension Plans.” Government of Canada, 26 Feb. 2024, www.canada.ca/en/services/taxes/savings-and-pension-plans.html. Accessed 9 Jan. 2025.
“Tax Alert.” Canada Revenue Agency, 16 Jan. 2022, www.canada.ca/en/revenue-agency/news/about-canada-revenue-agency-cra/tax-alert.html. Accessed 9 Jan. 2025.
"What Is an RRSP and How Does It Work." Get Smarter about Money, Ontario Securities Commission, 26 Nov. 2024, www.getsmarteraboutmoney.ca/learning-path/rrsps/what-is-an-rrsp-and-how-does-it-work. Accessed 9 Jan. 2025.