This is a Canada Revenue Agency (CRA) registered investment and retirement account that offers benefits for Canadians to save for retirement. Money invested in RRSP is not taxed as part of your income, so you pay less income tax.
Unlike a regular savings account, it’s where you make your investments and your growth isn’t taxed until you withdraw your money. You’re usually retired by the time you withdraw your money, so you’ll generally pay less taxes than you would in a year with more income, and you’ll have more money left over in retirement.
How does it work?
- Talk to an advisor to open an RRSP with the right investments depending on your retirement goals and your risk tolerance.
- Figure out the contributions that fit your situation, making sure you don’t go over your contribution room.
- Your annual contributions can be deducted from your taxable income, thereby reducing your overall tax bill.
- Any investment growth grows tax free.
- You can access money when you need it, but withdrawals are taxable.
- Alternatively, you can withdraw tax-free to buy your first home or for you or your spouse’s education, if you qualify.
- When you’re ready to retire or you turn 71, your RRSP converts to a RRIF where you must withdraw your minimum annual amount. Alternatively, you can purchase an income annuity.
What is your RRSP contribution limit?
Generally, your contribution limit is calculated by the Canada Revenue Agency based on these 3 factors:
- Total of your unused deduction room from the previous year
- Now add the smaller amount of:
– 18% of the earned income you reported on your tax return last year
– $27,830 (the annual limit for 2021) - Then subtract any pension adjustment from the previous year (if applicable)
What happens if you go over your RRSP limit?
You will be taxed 1% per month on any amount that is more than $2,000 over your contribution limit. If you don’t pay the additional tax within 90 days after the calendar year, you’ll face late-filing penalties or interest charged.