Understanding RRSPs

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a government approved plan through which you save money for your retirement years. Your contributions, within limits, are tax deductible, and the income earned is tax sheltered. You can have any number of plans.

What Does an RRSP Mean to You?

An RRSP allows you to invest money when you can most afford it – during your peak earning years – to build up a comfortable tax-sheltered retirement fund. The following graph shows the amount you could accumulate by annual RRSP contributions of $1,000 at the beginning of each year, assuming constant interest rates of 1.5%, 2.5% and 4% per year. Value (thousands of dollars) Not only do you receive a tax deduction for a contribution to an RRSP, but the earnings of your plan are not taxed until you withdraw them. Since 100% of these earnings can be reinvested and compounded, the growth of your RRSP increases rapidly over the years, as the above graph shows. Your retirement savings will also increase significantly if you make each RRSP contribution as soon as allowed, for example, early in the year.

What Happens at Retirement?

The first stage of an RRSP is to accumulate retirement savings. The next stage is to provide retirement income. Your accumulated savings may be invested in a variety of ways to provide a retirement income. Only the retirement income payments are taxed each year as you receive them, thus spreading the taxation of your accumulated savings over your retirement years.

Who is Eligible to Contribute?

Anyone with “earned income” subject to Canadian taxation, including non-residents, may contribute to an RRSP. Even if you have an income below the taxable threshold, you should file a tax return to report your earned income and create RRSP deduction room. You can make part or all of any contribution to a plan in your own name or to a plan in your spouse’s or common-law partner’s name. You, as the contributor, are still entitled to the tax deduction. Contributions can be made until the end of the year in which the planholder’s 71st birthday occurs. An over-contribution (see page 6) can be carried forward beyond this year and deducted in subsequent years providing you have earned income on which to base the deduction.

RRSP Deduction Limits

Your Notice of Assessment from CRA, received after filing your tax return, will state your RRSP deduction limit for the following year. At certain times of the year, you can also phone the CRA Tax Information Phone Service 1.800.267.6999 (TIPS) to confirm your deduction limit. This information is also available in My CRA Account. The calculation of the amount will depend on whether you are a member of a pension plan, and if you are, the type of pension plan. NOTE: The amount of RRSP contributions you can deduct from your income may be less than the amount you can contribute (see page 6). Employer contributions made to an RRSP on your behalf form part of your RRSP contribution. The worksheet on page 16 of this brochure will help you to calculate your RRSP deduction limit.