Table of Contents
What is an RRSP?
A Registered Retirement Savings Plan (
RRSP) is a registered savings and investment account meant for retirement savings. Savings placed into RRSPs earn tax-free interest, while investments placed in RRSPs make tax-free gains and dividends. A Canadian citizen can open an RRSP the moment that they start earning taxable income.
Contributing to an RRSP also reduces the yearly income tax that a person is required to pay each year. RRSPs, however, do not permit tax-free withdrawals and charge according to the account holder's income tax bracket. An RRSP withdrawal is considered earned income. Like the Tax-Free Savings Account (
TFSA), RRSPs come with a contribution limit that increases every year.
What savings and investments can RRSPs hold?
Contrary to common belief, the RRSP is a reasonably versatile saving and investing account.
RRSPs can hold regular savings along with many different types of investments, including stocks, Exchange-Traded Funds (ETFs), mutual funds, bonds, and Guaranteed Investment Certificates (GICs), among many other types of investments.
You can open an RRSP savings account online using charts like the one listed below.
Purchasing investments like stocks, ETFs, or mutual funds online requires an online brokerage or robo-advisor.
What is the RRSP contribution limit?
An
RRSP Contribution Limit is the maximum amount a person can contribute to an RRSP in one year. The RRSP deduction limit increases each year for every Canadian citizen. Unused contribution room from previous years carries forward. The RRSP Deduction Limit to the contribution limit each year equals 18% of the account holder’s annual income. The amount of room in an RRSP is the sum of every previous year’s contribution limits. Contributions made to date counts as the used room.
Canadians can contribute to an RRSP until the age of 71. There is, however, an RRSP deadline. The RRSP deadline is the last day a person can contribute to an RRSP and receive tax-benefits for that previous year.
Couples can use RRSPs as an income-splitting tool, as well.
Spousal RRSPs
permit higher-income spouses to contribute to the RRSP of a lower-income spouse. Over time, that money becomes the property of the lower-income spouse, and when they withdraw the money in the future, it is taxed at their income tax rate. By splitting income between the members of a couple, you can potentially pay lower tax rates overall.
The RRSP contribution limit for 2020 is $27,230. Below, you can find every RRSP contribution limit in Canada since 1991.
| Year |
Contribution Limit |
| 2020 |
$27,230 |
| 2019 |
$26,500 |
| 2018 |
$26,230 |
| 2017 |
$26,010 |
| 2016 |
$25,370 |
| 2015 |
$24,930 |
| 2014 |
$24,270 |
| 2013 |
$23,820 |
| 2012 |
$22,970 |
| 2011 |
$22,450 |
| 2010 |
$22,000 |
| 2009 |
$21,000 |
| 2008 |
$20,000 |
| 2007 |
$19,000 |
| 2006 |
$18,000 |
| 2005 |
$16,500 |
| 2004 |
$15,500 |
| 2003 |
$14,500 |
| 2002 |
$13,500 |
| 2001 |
$13,500 |
| 2000 |
$13,500 |
| 1999 |
$13,500 |
| 1998 |
$13,500 |
| 1997 |
$13,500 |
| 1996 |
$13,500 |
| 1995 |
$14,500 |
| 1994 |
$13,500 |
| 1993 |
$12,500 |
| 1992 |
$12,500 |
| 1991 |
$11,500 |
What is an RRSP deadline?
The
RRSP Contribution Deadline
is the last day that a Canadian citizen can make contributions to their RRSP and receive a tax reduction for the previous year.
For 2019, the RRSP deadline is March 1, 2020. The deadline is set at around 60 days into the following year.
How do RRSP withdrawals work?
There are quite a few reasons someone might withdraw RRSPs before retirement. However, this can be an expensive proposition. That said, there are quite a few
RRSP Withdrawal Rules
that everyone should know before choosing to withdraw their RRSPs.
Withdrawn RRSPs are taxed like regular income, at the same rate as the account holder's tax bracket. This is known as the
RRSP Withholding Tax
.
Canadians who own an RRSP also make tax-free withdrawals under the
RRSP Home Buyers' Plan
and the
Lifelong Learning Plan
(LLP).
Those withdrawals, however, are considered to be loans and require contribution into the RRSP over a specific period, or the money you borrowed will be considered part of your income and declared as withholding tax. The contribution room does not carry over to the following year once the payment is withdrawn, either.
Considering this, creating an
emergency fund
in savings or investing accounts with free withdrawals privileges, such as the
Tax-Free Savings Account
(TFSA) or the
High-Interest Savings Account
(HISA), might be much more suitable before saving or investing in an RRSP.
TFSAs vs. RRSPs
Whether you're thinking of using a
bank account
or
investing
, TFSAs vs RRSPs is a comparison many people tend to compare. TFSAs and RRSPs have many similarities when it comes to savings. Both a TFSA and an RRSP are:
Registered Accounts:
The TFSA and the RRSP are both registered accounts, meaning that they both registered with the Government of Canada and earned interest, gains, or dividends tax-free.
Contribution Limits:
Both types of accounts come with contribution limits, and while each account has its terms and conditions, increases in contribution room each year.
Flexibility:There are plenty of TFSA and RRSP investment options. Both accounts can hold pretty much any investment along with savings, including cash, Guaranteed Investment Certificates (GICs), Exchange-Traded Funds (ETFs), stocks, bonds, mutual funds and more.
TFSAs and RRSPs are quite different from each other, as well. Some of their most significant differences include:
Withdrawals:
The TFSA permits unlimited withdrawals, but the RRSP taxes every withdrawal that is not part of a particular program.
Contribution Room:
Unused contribution room in a TFSA carries forward each year. Unused room in an RRSP does not move forward.
Tax-deductions:
Contributing to an RRSP will lead to tax-deductions; however, contributing to a TFSA will not.
Are RRSPs worth it?
Naturally, whether RRSPs are worth it depends on your financial situation, along with additional factors such as age, income, and economic status.
RRSPs are a tool for tax deferral, meaning that making contributions over a year can reduce a high tax rate. It allows you to withdraw that money at a lower tax rate when you retire.
Maxing out a TFSA might be a more suitable option before contributing to RRSPs since tax-free withdrawals are not permitted: meaning once the money goes into the account, it will cost money to withdraw.