Financial planning for retirement is essential to maintain the same pace of life in retirement. Ideally, you should start saving (and investing) as early as possible in a retirement savings account, such as an RRSP. In fact, time is one of the key elements in investing, along with contributions and returns. Of course, it takes a great deal of discipline to accumulate sufficient funds for retirement. But it also requires the right financial tools. This guide explains everything you need to know about Registered Retirement Savings Plans (RRSPs).

An RRSP is a savings plan registered with the Canada Revenue Agency (CRA). It allows you to save for your retirement on a tax-deferred basis. Plus, your contributions are tax-deductible, and investment earnings are tax-free as long as the funds remain in the plan. However, you will be taxed when you disburse the funds at retirement.

The maximum RRSP contribution is 18% of your previous year’s eligible earnings, up to the annual limit (plus unused deductions). To obtain the tax deduction, you must have contributed to your RRSP no later than the first 60 days of the following year. For example, for the year 2024, the contribution limit is $31,560 and the deadline for contributing to your RRSP is March 1, 2025.

While there is no minimum age for RRSP contributions, there are eligibility criteria for opening an RRSP:

• You must be a Canadian resident with a Social Insurance Number (SIN).
• You must have earned employment income and filed an income tax return (or have unused deductions).
• You must be under the age of 71. Specifically, you can open and contribute to your RRSP no later than December 31 of the year in which you turn 71.

However, you cannot contribute to an RRSP if you only have investment income, capital gains or other income. Consult your CRA Notice of Assessment to find out the maximum amount you can contribute to your RRSP.

There are four main types of RRSPs:

• Individual RRSP: You can contribute to an individual RRSP if you have employment or business income (plus unused deductions).
• Spousal RRSP: You can contribute to your spouse’s RRSP up to your contribution limit. The funds will belong to your spouse, but you will receive the tax deductions.
• Group RRSP: The Group RRSP is a retirement savings plan that your employer can offer. Your contributions can be deducted directly from your paycheck, making it tax-efficient.
• Self-directed RRSP: A self-directed RRSP is ideal if you want to manage your own investments. You’re not limited to the investments offered by your financial institution, and you can invest in stocks and exchange-traded funds (ETFs).

You can open and contribute to several RRSPs. For example, an individual RRSP in addition to a group RRSP. However, the total amount contributed to your RRSP accounts must not exceed your contribution room.

As mentioned earlier, RRSPs allow you to defer taxes. But it doesn’t eliminate them (unlike TFSAs and FHSAs). Contributions to your RRSP are tax deductible. This means you can reduce your taxable income and get a tax refund. What’s more, by reducing your taxable income, you may become eligible for social tax measures or increase the amounts you already receive. For example, the Canada Child Benefit (CCB).

Investment income is not taxed as long as the funds remain in the plan. When you disburse the funds during retirement, however, you will be taxed. In your financial planning, make sure that your marginal tax rate in retirement will be lower than it was during your working life.

There are two exceptions to withdrawing funds from your RRSP tax-free: withdrawals to benefit from the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP). However, you must repay the amounts withdrawn from your RRSP within the prescribed period.

To obtain the tax deduction, you must contribute to your RRSP no later than the first 60 days of the following year. For the year 2024, the deadline for contributing to your RRSP is March 1, 2025. You don’t have to use your tax deduction immediately; you can carry it forward into the future. For example, when your taxable income (and tax rate) is higher.

You can contribute up to 18% of your previous year’s eligible income to your RRSP, up to the annual limit set by the CRA. For the year 2024, the contribution limit is $31,560 (a taxable income of $175,333 is required to reach this limit). Your unused contribution room from previous years must be added to this amount. To find out your RRSP contribution room, consult your Notice of Assessment sent by the CRA.

Note that your contribution limit will be reduced if you participate in an employer-sponsored pension plan. Your employer will calculate a pension adjustment based on your pension plan contributions. This pension adjustment will also appear on your Notice of Assessment.

For information, here are the contribution ceilings for recent years:

You can contribute more than your RRSP contribution room. However, this excess contribution (without penalty) is limited to $2,000 for life. If you exceed this amount, you will be charged a penalty of 1% per month on the excess amount until it is withdrawn from your RRSP. In addition, the excess amount withdrawn will be added to your taxable income for the current year.

Note: The advantage of the excess contribution is that it can grow on a tax-deferred basis.

Opening an RRSP in Canada is very simple. You can do so through a financial advisor at your bank, credit union, insurance company, or trust company.

But there are other options… You may decide to open an RRSP account with a robo-advisor, such as Wealthsimple Managed Investing, Qtrade Guided Portfolios, and Questwealth Portfolios (Questrade).

If you prefer independent management, you can open an RRSP account on an online brokerage platform such as CIBC Investor’s Edge, Questrade, Qtrade Direct Investing or Wealthsimple Trade.

Like the TFSA and FHSA, the RRSP is not an investment. Rather, it’s a savings plan in which you can invest. The following is a non-exhaustive list of the types of investments eligible for RRSPs:

• Cash
• Guaranteed Investment Certificates (GICs) (e.g. Tangerine GIC and EQ Bank GIC)
• Money Market funds
• Mutual funds
• Government or Corporate obligations
• Company shares (stocks)
• Exchange Traded Funds (ETFs)
• Asset allocation ETFs
• Buy and Sell options

Before you invest, make sure you know your investor profile. If you don’t already know it, you can use the tool provided by the Autorité des marchés financiers (AMF).

As a general rule, you’ll have to pay tax when you withdraw funds from your RRSP at retirement. However, RRSPs are not limited to retirement. You could, for example, dip into your RRSP if you lose your job, or as a last resort, to meet an urgent and unforeseen expense. In addition, there are two exceptions for withdrawing funds from your RRSP tax-free: withdrawals to benefit from the Home Buyers’ Plan (HBP) or the Lifelong Learning Plan (LLP).

To disburse funds from your RRSP at retirement, you have several options:

• Withdrawal: You can make a cash withdrawal, from which withholding tax (calculated according to the amount withdrawn) will be deducted (and sent to the government). The full amount of tax will be paid when you file your tax return.
• RRIF: You must transfer your RRSP to a Registered Retirement Income Fund (RRIF) no later than December 31 of the year in which you turn 71. Your funds will remain invested and tax-free, except for minimum withdrawals required by the government. Withdrawals from your RRIF will be taxed.
• Annuity: You can purchase a life annuity with your RRSP, which will provide you with a guaranteed, indexed income (in whole or in part) during your retirement. Your annuity payments will be taxed.

The Home Buyers’ Plan (HBP) is a program designed to help Canadians enter the real estate market. The HBP allows you to withdraw up to $60,000 (as of 2024) from your RRSPs to buy or build a qualifying home. However, the amount withdrawn must be repaid to your RRSP over a 15-year period, beginning two years after the year in which the funds were withdrawn from your RRSP.

What’s more, the HBP can be combined with the FHSA for your first eligible home purchase. This allows you to save up to $40,000 tax-free. You can then withdraw the funds accumulated in your FHSA, tax-free, to purchase your first eligible property.

A person who maximizes the HBP and the FHSA thus has access to $100,000 (plus the return generated in the FHSA) tax-free. For a couple, that’s over $200,000.

As you have seen in this guide, the advantages of an RRSP are numerous:

• Tax-deferred retirement savings
• Tax-deductible contributions (tax refund)
• Contributions possible during the first 60 days of the following year
• Tax deductions carried forward
• RRSP types (individual, joint, group, self-directed)
• Choice of investments (stocks, ETFs, etc.)
• Tax-free returns (as long as funds remain in the plan)
• Reduced taxable income (improves access to social and fiscal measures)
• Withdrawals taxed at marginal tax rate (generally lower at retirement)
• Tax-free withdrawals for Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP)
• Access to funds in case of need (e.g. job loss)
• Excess contribution without penalty
• Etc.

In short, an RRSP lets you save for retirement tax-free. Your contributions are tax-deductible, and your earnings are tax-free as long as the funds remain in your RRSP. Ideally, you should start saving and investing in your retirement savings account as soon as possible. This will enable you to maintain the same pace of life in retirement. Don’t hesitate to make an appointment with your financial advisor for help with your retirement financial planning.