RRSPs can be a tax-efficient way to build your retirement savings.
RRSPs at a Glance
Download (PDF 226KB) 3 min readBrought to you by Sound Choices - AGF Education for Investors and Advisors
A Registered Retirement Savings Plan (RRSP) is a plan that allows you to save money on a tax-deferred basis until you retire. Contributing every year can be a tax-efficient way to build your retirement savings.
What are the tax advantages?
A Registered Retirement Savings Plan (RRSP) is a plan that allows you to save money on a tax-deferred basis until you retire. Contributing every year can be a tax-efficient way to build your retirement savings.
RRSPs have various tax advantages compared to investing outside of a registered account:
- Within an RRSP, you do not have to pay tax on any income or growth that you earn.
- You only pay tax when you withdraw funds from your RRSP, which is hopefully when you are retired and potentially in a lower tax bracket.
- You also get immediate tax savings, because you can deduct the amount of your RRSP contributions from your income on your tax return.
Viewed another way, the actual cost of your contribution is reduced because of lower taxes. The table below shows the impact a $5,000 RRSP contribution would have at different marginal tax rates.
|
Hypothetical marginal tax rate* |
32% |
40% |
46% |
|
RRSP contribution |
$5,000 |
$5,000 |
$5,000 |
|
Reduced taxes |
$1,600 |
$2,000 |
$2,300 |
|
Actual cost of contribution |
$3,400 |
$3,000 |
$2,700 |
Who can invest in an RRSP?
Anyone who has earned income in the previous year and filed a Canadian tax return can contribute to an RRSP until December 31 of the year they turn 71.
How do contributions work?
The total amount you can contribute is:
- Determined by the Canada Revenue Agency (CRA) each year
- A percentage of earnings, minus any pension adjustments, plus unused contribution room from previous years.
Your pension adjustment amount is the value of any pension benefits you get from a registered plan or deferred profit-sharing plan. Your unused contribution room is the amount that wasn’t used in prior tax years, as determined by the CRA.
The maximum contribution amount may change, so check the Notice of Assessment you received from the CRA after filing your taxes. It will show your current RRSP contribution limit plus any unused room and pension adjustments. You can also visit the CRA website.
Be careful not to over-contribute. There’s a $2,000 lifetime over-contribution limit. Beyond that, you’ll pay a penalty tax of 1% per month on any over-contributions until you withdraw them from the plan.
You can make contributions to your RRSP throughout the year. Contributions made in the first two months of the year may be applied against either the earned income of the previous year or the current year. Contributions made between March and December are used to reduce taxable income in the year in which the contribution was made.
Why start now?
When you turn 65, you’ll receive modest pension benefits from the government, but for many Canadians, it’s not enough. According to Service Canada, the average combined Canada Pension Plan and Old Age Security benefit was approximately $1,404 per person per month as of October 2022.**
If that doesn’t sound like enough to cover your post-retirement needs, consider opening an RRSP and contributing regularly. Speak to a financial advisor to find out how to get started.
To learn more about the RRSP options available to you, visit AGF.com/RRSP.
**Sources: https://www.canada.ca/en/services/benefits/publicpensions/cpp/payment-amounts.html,
https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments.html.
Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
The information contained in this document is designed to provide you with general information and is not intended to be tax advice applicable to the circumstances of the investor. Investors should consult their investment professionals and tax advisors prior to implementing any changes to their investment strategies.
The contents of this website are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.
AGF Investments is a group of wholly owned subsidiaries of AGF and includes AGF Investments Inc., AGF Investments America Inc., AGF Investments LLC, and AGF International Advisors Company Limited. The term AGF Investments may refer to one or more of the direct or indirect subsidiaries of AGF or to all of them jointly. This term is used for convenience and does not precisely describe any of the separate companies, each of which manages its own affairs.
® The “AGF” logo and all associated trademarks are registered trademarks of AGF Management Limited and used under licence.
RO 2682552
January 23, 2023