Registered Retirement Savings Plan (RRSP): Definition and Types

What Is a Registered Retirement Savings Plan (RRSP)?

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. Registered Retirement Savings Plans have many features in common with 401(k) plans in the United States, but also some key differences.

The growth of an RRSP is determined by its contents. Simply having money in an RRSP is not a guarantee that you may retire comfortably; however, it is a guarantee that the investments will compound without being taxed, as long as the funds are not withdrawn.

Key Takeaways

  • Registered Retirement Savings Plans (RRSPs) are a retirement savings and investing vehicle available to employees and self-employed individuals in Canada.
  • In many ways they are similar to 401(k) plans or Individual Retirement Accounts (IRAs) in the U.S.
  • Contributions to an RRSP are made on a pre-tax basis and grow tax-free until they are withdrawn, at which point they are taxed at the marginal rate.
  • Contributions can be deducted against current income and the growth of RRSP investments being tax-deferred.
  • A wide range of investment options are permitted within an RRSP, including mutual funds, exchange-traded funds, individual stocks, and bonds.


Benefits of Registered Retirement Savings Plans (RRSPs)

Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act. They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing, and what assets are allowed.

RRSPs have two main tax advantages. First, contributors may deduct contributions against their income. For example, if a contributor's tax rate is 40%, every $100 they invest in an RRSP will save that person $40 in taxes, up to their contribution limit. Second, the growth of RRSP investments is tax-deferred. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. This means that investments under RRSPs compound on a pre-deferred basis.

In effect, RRSP contributors delay the payment of taxes until retirement, when their marginal tax rate may be lower than during their working years. The government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which will help the population rely less on the Canadian Pension Plan to fund retirement.

Types of RRSPs

There are a number of RRSP types, but generally, they are set up by one or two associated people (usually individuals or spouses).

  • An Individual RRSP it set up by a single person who is both the account holder and the contributor.
  • A Spousal RRSP provides benefits for a single spouse and also a tax benefit for both spouses. A high-earner (spousal contributor) may contribute to a Spousal RRSP in their spouse's name (the account holder). Since retirement income is divided evenly, each spouse can benefit from a lower marginal tax rate.
  • A Group RRSP is set up by an employer for employees and is funded with payroll deductions, much like a 401(k) plan in the U.S. It is administered by an investment manager and affords contributors the advantage of immediate tax savings.
  • A Pooled RRSP is an option created for small business employees and employers, as well as the self-employed.

A Canadian retirement savings plan (RSP) and a registered retirement savings plan (RRSP) both refer to the same thing and both acronyms can be used interchangeably. Some people use RSP for an individual RRSP (similar to an IRA in America) and RRSP for group or pooled plans. However, this distinction is only superficial and both individual and group plans offer the same tax advantages and other benefits.

RRSP Investment Options

Several types of investment and investment accounts are permitted in RRSPs. They include:

  • Mutual funds
  • Exchange-traded funds
  • Equities (Stocks)
  • Bonds
  • Savings accounts
  • Mortgage loans
  • Income trusts
  • Guaranteed investment certificates
  • Foreign currency
  • Labor-sponsored funds

RRSP Contribution Limits

The RRSP contribution limit for 2022 is 18% of the earned income an individual has reported on their 2021 tax return, up to a maximum of CAD $29,210, according to the Canada Revenue Agency. For 2023, that increases to CAD $30,780, and CAD $31,560 for tax year 2024.

It is possible to contribute more, but additional sums over CAD $2,000 will be hit with penalties.

Registered Retirement Income Funds (RRIFs)

In the year an RRSP holder turns 71, the RRSP balance must be liquidated or shifted to a Registered Retirement Income Fund (RRIF) or to an annuity. An RRIF is a retirement fund similar to an annuity contract that pays out income to a beneficiary or a number of beneficiaries.

Money withdrawn from an RRSP through RRIF account payouts is taxed at the account holder's marginal tax rate. If the account holder has $300,000 saved for retirement and is 65 years old, the RRIF will pay about $1,000 per month. If this $1,000 is the only source of income, the account holder will be taxed at a marginal rate of 15%, leaving about $850 every month. The account holder may also receive a monthly Canada Pension Plan.

Registered Retirement Savings Plan vs. 401(k)

Despite their basic similarities, RRSPs and 401(k)s have differences too:

  • RRSPs may be set up via a financial institution; 401(k)s are set up by employers.
  • RRSP contribution limits may be carried forward.
  • RRSP contributions may come from payroll deductions or cash contributions (which may lead to a tax rebate); 401(k)s are funded with payroll deductions.
  • 401(k)s have early withdrawal penalties (though there are exceptions); RRSPs do not.

At What Age Are You Eligible to Withdraw to an RRSP?

An RRSP account holder may withdraw money or investments at any age. Any sum is included as taxable income in the year of the withdrawal—unless the money is used to buy or build a home or for education (with some conditions).

You can contribute money to an RRSP plan at any age.

How Much Money Should I Put in an RRSP?

While the amount you should contribute to your RRSP depends on your individual circumstances, a common rule of thumb is to save at least 10-15% of your gross income for retirement. This may be more or less depending on your age, retirement goals, and other financial considerations. Note that there are annual contribution limits set by the CRA.

It's important to consider your other financial priorities and make sure you have enough money to meet your current needs before contributing to an RRSP. For example, you may want to pay off high-interest debt or build up an emergency fund before maxing out an RRSP.

Ultimately, the best strategy will depend on your individual financial situation, goals, and risk tolerance. It's a good idea to work with a financial advisor or professional to determine the best approach for you.

Can I Cash Out My RRSP?

Yes, you can cash out your Registered Retirement Savings Plan (RRSP) at any time, but it's important to be aware of the tax implications of doing so. When you cash out your RRSP, you will be required to pay the deferred income tax on the amount withdrawn at your marginal tax rate in the year of withdrawal. If you are under the age of 71, you will also be required to pay a withholding tax on the amount withdrawn. The withholding tax is a percentage of the amount withdrawn and is withheld by the financial institution that holds your RRSP. The amount of withholding tax depends on the amount withdrawn and your province of residence (it is generally lower in Quebec).

Is a TFSA Better Than an RRSP?

Whether an RRSP or a TFSA is better for you depends on your individual financial situation and goals.

A Tax-Free Savings Account (TFSA) is a personal savings and investing account available to Canadian residents who are 18 years of age or older. TFSAs allow you to save and invest money on a tax-free basis, which means that you don't have to pay tax on the income or capital gains earned within the account. TFSAs offer a wide range of investment options, including mutual funds, exchange-traded funds, individual stocks, and bonds. TFSAs can be used to save for a variety of financial goals, including retirement, education, a down payment on a home, or emergencies.

Both Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) are useful tools for saving and investing for the long term, but they have different features and tax implications. Contributions to an RRSP are made on a pre-tax basis and can be deducted from your income when you file your tax return, while contributions to a TFSA are made with after-tax dollars. This means that RRSP contributions can reduce the amount of tax you owe in the current year, while TFSA contributions do not offer a current-year tax benefit. Withdrawals from an RRSP are taxed as income in the year they are made, while withdrawals from a TFSA are tax-free. This means that if you expect your marginal tax rate to be lower in retirement, an RRSP may be more beneficial, as you will be taxed at a lower rate when you withdraw the funds. On the other hand, if you expect your marginal tax rate to be the same or higher in retirement, a TFSA may be a better choice, as you won't have to pay tax on your withdrawals.

The Bottom Line

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle available to employees and self-employed individuals in Canada. In many ways, they are similar to 401(k) or IRA retirement accounts in the United States. Contributions to an RRSP are made on a pre-tax basis and grow tax-free until they are withdrawn, at which point they are taxed at the marginal rate. RRSPs offer several tax advantages, including the ability for contributors to deduct contributions against their income and the growth of RRSP investments being tax-deferred. There are several types of RRSPs, including individual, spousal, group, and pooled plans, and a wide range of investment options are permitted within an RRSP, including mutual funds, exchange-traded funds, individual stocks, and bonds. The contribution limit for RRSPs is set by the Canadian Revenue Agency (CRA) and is based on the contributor's earned income.

Article Sources
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  1. Government of Canada. "Deferred and Other Special Income Arrangements."

  2. Government of Canada. "Definitions for RRSPs."

  3. Government of Canada. "Setting up an RRSP."

  4. Government of Canada. "Employers' Guide – Payroll Deductions and Remittances."

  5. Government of Canada. "The Pooled Registered Pension Plan (PRPP)."

  6. Government of Canada. "Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs."

  7. Government of Canada. "MP, DB, RRSP, DPSP, and TFSA limits and the YMPE."

  8. Government of Canada. "Options for your own RRSPs."

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