All About Registered Retirement Savings Plans (RRSPs)

Having an RRSP helps you save for retirement on a tax-sheltered basis, while allowing your savings to grow faster. Every contribution to your RRSP does this in two ways:

1) You get a tax refund on all contributions you make to your RRSP (that’s money right back in your pocket instead on towards taxes)
2) The money you earn through investments in the RRSP is not taxed

When you start investing in an RRSP, you can start thinking of retiring more comfortably as you work towards being able to supplement your post-retirement income.

An RRSP can hold the following types of investments:

• Mutual funds
• Exchange-traded funds
• Equities
• Bonds
• Savings accounts
• Income trusts
• Guaranteed investment certificates
• Foreign currency

It’s important to note that all withdrawals from your RRSP are subject to taxes. However, if you withdraw your funds after retirement, you’ll be in a lower tax bracket than you were during your working years which means you’ll pay less tax on withdrawals. Your RRSP will have accumulated tax-free for a number of years so it will have grown much more quickly than if you did not contribute to an RRSP in the first place.

There are many different types of RRSPs available to you depending on the type of ownership and tax benefits you’re looking for. The different types of RRSPs available are:

• An Individual RRSP – This type of RRSP is held under one registered name and account holder. When you sign up for an individual RRSP, you are the sole contributor and beneficiary of the account.
• A Spousal RRSP – A spousal RRSP allows for a spouse to utilize their RRSP account for the tax benefit of both spouses. The higher earning spouse can also contribute to the spousal RRSP in their spouse's name (the account holder). The spousal RRSP ensures that you and your spouse both have a significant income at retirement.
• A Group RRSP – This type of RRSP can be set up by an employer for their employees and is typically funded through payroll deductions. The employer will pay the cost of opening and managing the plan. When you’re a part of a group RRSP, the withdrawal rules depend on your employer and the financial institution holding the account.
• A Pooled RRSP – A Pooled RRSP is an option created for any small business employees or self-employed individuals who have no access to a workplace pension. The pool helps plan members save up for their retirement and is managed by a licensed administrator.

You can withdraw money from your RRSP as long as your funds aren’t locked in a specific contract. Your withdrawals will be subject to taxes and counted as income in your annual taxes. Your bank may take anywhere from 10% to 31% right off the top and turn it over to the government — the more you withdraw, the higher the percentage you will be taxed. For these reasons, in most cases withdrawing from your RRSP before you are 71 is not recommended.

There are some exceptions to the above rule. If the funds withdrawn are under a special plan such as the Home Buyers' Plan or the Lifelong Learning Plan it will not be considered income and no taxes will be due.

If you are turning 71 by the end of the calendar year, your RRSP must be collapsed. You have two options:

You can withdraw the full amount as a lump sum withdrawal. The withdrawal will be subject to taxes and added as income.
You can convert the RRSP to a Registered Retirement Income Fund (RRIF) and start drawing payments the fund. The CRA sets a minimum amount that can be withdrawn, which you can read more about RRIFs here.

The RRSP Home Buyers’ Plan allows you to borrow up to $35,000 from your RRSP to put towards buying or building your first home. Any legally married or common-law couple can withdraw up to $35,000 each, for a total of $70,000 towards the purchase or construction of a new home. Learn more about the Canadian Home Buyer’s Plan.