^InsightsWhat is a Registered Retirement Savings Plan (RRSP)?

You can hold a wide range of investments within an RRSP, depending on the type of plan, including stocks, bonds, guaranteed investment certificates (GICs), and mutual funds. Investment income earned from these investments, is tax-deferred in the RRSP until you withdraw the funds.

How much you can contribute annually is subject to a maximum contribution amount, known as your RRSP contribution or deduction limit. Your RRSP contribution limit for 2021 is equal to 18% of your 2020 earned income, or $27,830 (whichever is lower) plus previous unused contribution room less any pension adjustments.

There’s no minimum age required to open an RRSP.

However, some financial institutions may require customers to be the age of majority. You can set up and contribute to an RRSP up to the end of the year you turn 71 as long as you are a Canadian resident, have earned income and file a tax return.

Making an RRSP contribution is a great way to plan for your future. By contributing to an RRSP, you can reduce your taxable income, pay less tax now, and potentially build a larger retirement fund.

To help you get started, we break down the rules on making RRSP contributions, so that you can make the most mileage out of your plan and avoid tax penalties.

When can I start contributing to an RRSP?

When it comes to RRSP eligibility, here are a few basics worth knowing.

• There is no minimum age for opening an RRSP. In fact, those under 18 may be able to set one up with their parent or guardian.
• However, some financial institutions may require customers to be the age of majority.
• You can set up and contribute to an RRSP as long as you have employment income, contribution room, and file a tax return.

Understanding your RRSP Contribution Limit

Your RRSP contribution limit, also known as your “deduction limit”, is the maximum amount you can contribute to your personal or a spousal RRSP in a given year.

It can be found on the bottom of your Notice of Assessment or Reassessment.

How is my RRSP contribution limit calculated?

The Canada Revenue Agency generally calculates your RRSP deduction limit as follows: the lesser of 1) 18% of the earned income you reported on your tax return in the previous year and 2) the annual RRSP limit plus: Please note:

• Pension adjustments, past service pension adjustments, pension adjustment reversals, and unused RRSP, PRPP or SPP contributions at the end of the previous year can also affect your RRSP contribution limit.

How much can I contribute to an RRSP this year?

The RRSP contribution limit for 2022 is $29,210. The Canada Revenue Agency generally calculates your RRSP deduction limit as follows: the lesser of 1) 18% of the earned income you reported on your tax return in the previous year and 2) the annual RRSP limit: as listed on the previous year’s tax return, up to a maximum of $29,210 plus any contribution room carried forward from previous years less any pension adjustments.

RRSP contribution limits for previous years were:

• 2021: $27,830
• 2020: $27,230
• 2019: $26,500
• 2018: $26,230
• 2017: $26,010
• 2016: $25,370
• 2015: $24,930

The most up-to-date contribution limits can be found on the CRA website here.

If you go over your RRSP contribution limit by $2,000 or less, you won’t be penalized; however, you can’t deduct these excess contributions from your taxable income. Excess contributions over $2,000, on the other hand, are penalized and you must pay a 1 percent tax per month.

Your over-contributions must be reported to the Canada Revenue Agency (CRA) within 90 days after the last day of the tax year when you over-contributed. Reports filed after that deadline may be subjected to an additional penalty equal to 5 percent of the taxes you owe plus an extra 1 percent for every month, to a maximum of 12 months.

Can the Canada Revenue Agency (CRA) cancel or waive the tax on your excess contributions?

The CRA states that this tax can potentially be waived or cancelled if you submit the following:

• A request to cancel or waive the tax.
• Copies of your RRSP, PRPP, specified pension plan (SPP) or RRIF statements that show the date you withdrew your excess contributions.

Any other correspondence that shows that your excess contributions are due to a reasonable error.

What happens if I don’t report excess contributions on my return?

If you submit your T1-OVP, 2019 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions after the deadline, you could be subject to a penalty of 5% of your balance owing, plus another 1% of your owed balance is added for each month you are late. The monthly 1% penalty has a maximum of 12 months total.

RRSPs (Registered Retirement Savings Plans) can be effective vehicles to save for retirement; but making withdrawals from these tax-advantaged plans may impact your tax bill. To make the most of your RRSP, learn more about the potential cost of withdrawing from an RRSP.

When can I withdraw from my RRSP?

You can make a withdrawal from your RRSP any time as long as your funds are not in a locked-in plan. The withdrawal, however, is subject to withholding tax and the amount also needs to be included as income when filing your taxes.

There are situations in which tax-deferred withdrawals can be made from your RRSP. For instance: If the funds are used for the purchase of a home for the first time through the Home Buyers’ Plan or for funding education through the Lifelong Learning Plan. For each scenario, no withholding tax is paid, and the withdrawal will not be considered income (provided the withdrawal is paid back into the RRSP within the applicable timelines).

Four Key Types of Withdrawals:

• Mandatory RRSP Withdrawals at Maturity

• Withdrawing from an RRSP Before Maturity

• Withdrawing from your RRSP Without Paying Taxes

• Spousal RRSP Withdrawals

Mandatory RRSP Withdrawals at Maturity

Your RRSP reaches maturity on the last day of the calendar year you turn 71.

At this point, you can access your RRSP assets through 3 maturity options. The tax implications of your decision depend on the option that you choose.

1. Maturity Option #1: Make a Lump Sum RRSP Withdrawal

You can choose to withdraw all the funds in your RRSP as a lump sum, but the withdrawn amount will be subject to withholding tax. The withholding tax gets taken out of your withdrawal immediately and paid to the government.

Additionally, this amount must be added to your income when filing your taxes.

1. Maturity Option #2: Convert RRSP to RRIF

You can choose to convert your RRSP to a RRIF (Registered Retirement Income Fund). A RRIF gives you a steady flow of retirement income, with a minimum amount that must be withdrawn each year.

When converting from your RRSP to a RRIF, it’s important to keep a couple things in mind:

• Annual withdrawals: You must make annual minimum withdrawals from your RRIF. These minimum withdrawals must be included in your taxable income each year but are not subject to withholding tax at the time of the withdrawal. Any amount withdrawn over the minimum amount will be subject to withholding tax. See the schedule for RRIF withdrawals.

• You could run out of money: Your return might not exceed your RRIF withdrawal rate, in which case you could eventually outlive your savings.

1. Maturity Option #3: Purchase an Annuity

You can convert your RRSP to an annuity which offers a guaranteed income for life or for a specified period. Withholding tax is not applied on amounts that are used to purchase an annuity. You may have to pay tax on the income when you start receiving payments.

Withdrawing from an RRSP Before Maturity

Understanding the tax implications of withdrawing from your RRSP before maturity can help you decide if and when you should. If you make an early RRSP withdrawal:

You pay a withholding tax: The withholding tax varies depending on the amount withdrawn and your province of residence.

You pay income tax: Your withdrawals must be reported on your tax return as income. If your current income is higher than your retirement income, you’ll pay more taxes now.

You lose out on tax-deferred compounding: Because RRSP contributions can compound over time, even a small withdrawal made today can have a big impact on your savings later.

You lose your contribution room: When you withdraw funds from an RRSP, you permanently lose the contribution room you originally used to make your contribution.

Withdrawing from your RRSP Without Paying Taxes

You can withdraw from your RRSP, tax-deferred, if the funds withdrawn will be used to buy your first home or finance your education.

• Home Buyers’ Plan (HBP): Planning on buying a home for the first time? With the Home Buyers’ Plan, you can withdraw up to $35,000 without paying withholding tax or including the withdrawal as income to put towards your first home, as long as you meet the Canada Revenue Agency’s (CRA) eligibility criteria and other conditions.

Repayments begin two years after you withdraw the funds and you have fifteen years to complete your repayments to your RRSP. You’ll receive an annual statement of account from the CRA outlining your balance, payments made and the minimum payment amount for the following year.

• Lifelong Learning Plan (LLP): The Lifelong Learning Plan allows you to withdraw from your RRSP to help pay for full-time education or training for you or your spouse or common-law partner. The withdrawal is not taxable as long as the funds are paid back to your RRSP over a 10-year period, typically starting five years after your first withdrawal.

Up to $10,000 can be withdrawn annually with a maximum lifetime withdrawal of up to $20,000 if you meet the criteria.

Spousal RRSP Withdrawals

Withdrawals from a Spousal RRSP, can only be made by the annuitant (generally, the person for whom the plan provides a retirement income).

If you contribute to a Spousal RRSP in the year of the withdrawal, or the two preceding years – you, not the annuitant, may be required to include the withdrawal amount as income. This is known as the attribution rule.

You have the flexibility to hold and move your money between a wide range of eligible investments in your RRSP. These investments may include:

• Cash
• Savings account
• GICs (Guaranteed Investment Certificates): An investment that offers a guaranteed rate of return over a fixed period.
• Mutual Funds: An investment fund that pools the money of individual investors and uses it to buy securities such as stocks, bonds or other mutual funds. Unlike most other types of investment funds, mutual funds are “open-ended,” which means as more people invest, the fund issues new units.
• Government and Corporate Savings Bonds: investments that work like an IOU (I-Owe-You), wherein investors make loans to a company/government, and usually earn a fixed rate of return.
• Securities listed on a designated stock exchange – including individual stocks.
• ETFs: An investment fund that holds the same mix of investments as a stock or bond market index and trades on a stock exchange.

TFSAs and RRSPs offer tax advantages that can help you achieve your saving and investing goals. In choosing one over the other, it’s important to understand the differences and the benefits of each type of registered plan.

An RRSP is designed specifically to provide you with income after you retire. Your annual contribution limit is based on your prior year income, subject to certain adjustments and an annual maximum limit. Information on your contribution limit can be found on your prior year notice of assessment. The contributions you make are tax-deductible; withdrawals, on the other hand, are subject to taxation.

A TFSA is not designed specifically for retirement and can help you save money for a wide range of goals. The amount you can contribute is not based on your income and your contributions are not tax-deductible. You can withdraw your money any time you want it, and you don’t pay tax on those withdrawals. You are also able to recontribute amounts withdrawn from your TFSA the following year or subsequent years without impacting your contribution room in those years.