RRSP – Registered Retirement Savings Plan What are the advantages?

Putting money in an RRSP may lower your income tax.

Here is what you should know about an RRSP.

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How does an RRSP work?

When you deposit money in an RRSP (make a contribution), you can deduct this amount from your taxable incomeTaxable income is the portion of income that is used to calculate tax due. Some types of investments, such as RRSPs, can be used to lower taxable income, and therefore for most people, tax due. . For example, if you earn $45,000 per year and you contribute $5,000 to your RRSP, your income tax is calculated on the basis of $40,000.

The money you contribute to your RRSP can be invested in various ways.

For example:

  • Guaranteed Investment CertificatesA guaranteed investment certificate (GIC), also called a certificate of deposit or term deposit, is a security indicating that an investor has lent money to a financial institution. GICs earn interest. 
  • BondsA bond is a security issued by governments and companies through which an investor lends money to the issuer.
    In general, the government or company promises to pay the investor interest at a fixed rate and at certain intervals (for example, 2% per year). Interest is normally paid twice a year. At maturity, the government or company pays back a predetermined amount that is called the face value. The face value is usually $1,000.
    There are several types of bonds:
    Stripped bondReal return bondConvertible bondSavings bondRetractable bondUnsecured bondEtc. 
  • SharesA share, also referred to as stock, is an equity security that entitles you to an ownership interest in a company.
    The company can distribute a portion of its earnings to shareholders by paying them a dividend.
    The shares of companies listed on an exchange are bought and sold at the exchange.
    When a company ceases to operate, the proceeds from the sale of its assets are used to pay its debts and taxes, and the rest of the money is distributed to shareholders.
  • etc.
Insight

For information about authorized investments, see the Canada Revenue Agency's website This link will open in a new window on self-directed RRSPs.

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You don't pay any income tax on returns generated by these investments (interest, dividends, capital gains), provided the money stays in the RRSP.

For example, if your investment of $5,000 generates $250 per year, you won't pay any income tax on the $250, as long as it stays in your RRSP. Over a period of 10, 20 or 30 years, it makes a big difference.

Remember that RRSPs aren't the only investment option you can choose in preparation for retirement.

How much should you invest in your RRSP?

The answer depends on your retirement planning. For example:

  • What are your retirement plans? (Travelling? Buying a cottage? Starting up a business? Or simply spending time at home?)

How much do you need to save to carry out these plans in 10, 15 or 20 years?

  • How much of your savings can you contribute to your RRSP?
  • How much can you set aside per week or per month?
  • How much can you pay back if you borrow the money you’re contributing to your RRSP?
  • Should you put your money into other investment products instead, such as a Tax-Free Savings Account (TFSA) or a Voluntary Retirement Savings Plan (VRSP)?
Insight

Some helpful tools

Retirement quizzes

Retirement Calculator This link will open in a new window

Reviewing Your Personal Finances (pdf - 487 KB)This link will open in a new windowUpdated on June 17, 2022

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Is it preferable to start investing in an RRSP from a young age?

The answer to this question depends on your retirement planning. One thing is certain: The earlier you start contributing to your RRSP, the longer your investment will have to grow. In reality, your investment strategy could change with your age. For concrete examples and all the necessary explanations, refer to the page entitled Your RRSP strategy at ages 25, 40 and 55.

What are the contribution limits?

The maximum amount you can contribute to your RRSP is indicated on your notice of assessmentThe notice of assessment is a document issued by the government following a summary audit of a person or company’s tax return. It indicates the amount to be paid to the government or to be reimbursed by the government.. Several amounts go into calculating your limit:

  • Every year, you can contribute 18% of the salary you earned the previous year. The contribution limit is $30,780 in 2023 and $31,560 in 2024, minus the pension adjustment indicated on your T4 slip issued by the Canada Revenue Agency.
  • The limit of 18% of one's annual salary will decrease under certain circumstances. For example:
    • If you are a member of your employer's pension plan, the maximum amount you can contribute will be reduced by the "pension adjustment" determined by the Canada Revenue Agency on your T4 slipA T4 slip is a form that an employer completes and submits to the Canada Revenue Agency to declare amounts paid to an employee (usually a salary) during the year, as well as various deductions retained.
      The T4 is essential for completing an income tax return.
      The corresponding form that is submitted to the Government of Québec is the RL-1 slip.       . 
    • Furthermore, the money you invest in a VRSP will be deducted from the maximum amount you can contribute to your RRSP.
  • You can also add all of the unused amounts from previous years (your "unused contribution roomUnused contribution room is contribution room that a person had in previous years but that they did not use.
    Unused contribution room from previous years is generally added to the contribution room for the current year to determine the total amount that a person can put in their RRSP, VRSP, TFSA or other registered plan, without paying a penalty.      "). For example, if you were allowed to contribute $7,000 to your RRSP last year but you contributed only $4,000, the unused $3,000 gets added to your maximum amount for this year. You can add all amounts unused since 1991. This allows you to make a much larger contribution during a year than the maximum 18% of your salary.

If you exceed the allowed limit for your RRSP, you may have to pay tax of 1% per month on the overcontributed amount.

When are the deadlines?

You can contribute to your RRSP on any day of the year, up to December 31 of the year in which you turn 71.

To reduce the income tax paid for a given year, you must make a contribution between January 1 and December 31 of that year, or within the first 60 days of the following year. If the 60th day falls on a Saturday or Sunday, the deadline is extended until the following Monday. The deadline is therefore always between February 29 and March 3.

Can I withdraw money from my RRSP before retirement?

Yes. However, you'll have to pay tax on it. You'll have to add the amount that you withdraw from your RRSP to your taxable incomeTaxable income is the portion of income that is used to calculate tax due. Some types of investments, such as RRSPs, can be used to lower taxable income, and therefore for most people, tax due. , whether or not you're retired.

Exception: the HBP (Home Buyers' Plan) , used for purchasing a home.

Before making a decision, check these two points:

  • Your money may not be accessible. For example, if you took out a 5-year non-redeemable term deposit, you can't withdraw the money before the five years are up.
  • The financial institutionA financial institution is a company or organization that provides financial services (loans, etc.) to the public and to businesses. Banks, trust companies and credit unions are financial institutions. that manages your RRSP could hold back a portion of the money for taxes. It could also ask you to pay a fee.

Can I withdraw money from my RRSP to buy a home?

Yes. Find out about the  HBP : Home Buyers' Plan.

What happens in the event of divorce?

Following a divorce, your ex-spouse may be entitled to a portion of your RRSPs. A divorce also changes your financial planning. If you get divorced, you'll need to adjust your retirement plan.

What happens in the event of bankruptcy?

As a rule, only contributions you've made in the 12  months preceding your bankruptcy can be seized. The rest of your RRSP and your other registered investmentsA registered investment is an investment made in a registered plan, such as an RRSP. can't be seized. For more information, visit the Conseil des Syndics de faillite This link will open in a new window website.

Insight

You’ve worked hard for your money. Plan your investments with care.

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Your RRSP strategy at ages 25, 40 and 55

How you choose your RRSP investments generally evolves as you approach retirement. Below is an example of an investment strategy that changes at three life stages. 

Around age 25

At 25, retirement seems very far off. However, the earlier you start planning for retirement, the easier it will be to accumulate the savings you’ll need.

To be financially well-prepared for retirement, you’ll need to:

  1. Determine the age at which you want to retire.

  2. Think about what you want to do once you retire and estimate annual expenses.

  3. Calculate the amount you’ll need to set aside every year in order to retire.

These three steps can be done at the same time. You may want to retire relatively young, but then realize at step 3 that you won’t have enough savings. In that case, go back to step 1 to set a new retirement age and repeat the exercise. You could also opt to reduce your anticipated expenses during retirement. These decisions are up to you. What’s most important is making the choice that’s both right for you and realistic.

You’ll need a savings and investment strategy to achieve this objective. Be sure to set realistic goals for investment returns. Don’t count on returns that are unachievable.

A small amount invested every year over the long term turns into substantial gains.

Amount invested annually

Number of years

Return

Total invested

$ at the end

$1,000

10

5%

$10,000

$13,207

$1,000

25

5%

$25,000

$50,113

$1,000

40

5%

$40,000

$126,840
Warning

Remember to consider inflation

Over the past 50 years, inflationInflation is the widespread increase in the price of consumer goods and services. It is the opposite of deflation.
For an approximation of inflation’s impact on an investment’s return, subtract the annual inflation rate from the annual rate of return. For example, if you hold a guaranteed investment certificate (GIC) earning 1.5% when inflation is 2%, your real rate of return (after inflation) is approximately -0.5%. In other words, in this example, if you take inflation into account, you’re losing money.  has increased prices by a factor of 7.5. In other words, something that was $135,000 in 1965 might now cost $1,000,000. It’s highly likely that prices will continue to climb in the decades ahead.

If you don’t consider inflation when determining your needs, you’ll greatly underestimate the amount you need to save and invest.

How can you factor in inflation? The Mon plan, je le fais maintenant! calculator does it for you!

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Inflation is eating up your investments

For $ 1,000 invested annually for 40 years at a 5% return, we get $ 127,000.

If inflation is taken into account:

Inflation

$ at the end, considering inflation

Losses due to inflation

0%

$127,000

0%

2,5%

$68,000

46%

5%

$40,000

69%

The money you save by age 25 could generally be invested over a very long period.

Depending on your investor profile, you can therefore choose the investments that are most likely to provide the best return over such a long period. However, the investments that are most profitable over the long term are often those that fluctuate most in the short term. In practical terms, your RRSP’s value could decrease over a few months or even a few years. Make sure you are able to cope with this.

Contributing earlier means contributing less to achieve the same result

Contributing during 25 years :

Period of life in which
contributions are made

Amount invested
annually

Total
investment

$ at retirement

ages 25 to 50

$2,000

$50,000

$208,365

ages 40 to 65

$4,000

$100,000

$200,454

Around age 40

This is a good time to ask yourself a few questions:

  • Do I need to change my estimate of the amount I’ll need annually during retirement?
  • Do I need to change my estimate of the amount I should save annually to achieve my retirement goal?
  • Am I able to set this amount aside?
  • You could ask yourself these questions every year, or when your financial situation changes, for example in the event of a job loss, a divorce, or the birth of a child.

Here are some tools to help you:

You may want to increase your annual RRSP contribution. You might have unused contribution roomUnused contribution room is contribution room that a person had in previous years but that they did not use.
Unused contribution room from previous years is generally added to the contribution room for the current year to determine the total amount that a person can put in their RRSP, VRSP, TFSA or other registered plan, without paying a penalty.   that you can use.

The advantage of contributing early in the year

Number
of years

Amount invested annually

Return

$ accumulated
(contributions early in year)

$ accumulated
(contributions late in year)

Difference

10

$4,000

5%

$52,827

$50,312

$2,515

25

$4,000

5%

$200,454

$190,908

$9,546

40

$4,000

5%

$507,359

$483,199

$24,160

Around age 55

Retirement is just around the corner

Some people will want to start replacing their higher risk investments with ones that fluctuate less. For example, if the markets should plummet, you may not have enough time to recover your losses before needing this money for your retirement. Update your investor profile.

Money accumulated by rate of return

Number
of years

Amount invested annually

Rates of return

$ accumulated

10

$4,000

2%

$44,675

10

$4,000

3%

$47,231

10

$4,000

4%

$49,945

10

$4,000

5%

$52,827

25

$4,000

2%

$130,684

25

$4,000

3%

$150,212

25

$4,000

4%

$173,247

25

$4,000

5%

$200,454

40

$4,000

2%

$246,440

40

$4,000

3%

$310,653

40

$4,000

4%

$395,306

40

$4,000

5%

$507,359
Warning

Each case is different

This is the reason you should plan for retirement based on your own goals and financial situation.

Don’t hesitate to seek help from a representative authorized by the AMF.  

End of the warning

Documentation and tools


Guide to financial planning for retirement This link will open in a new window

How long will it take for my investments to recover?

Retirement quizzes