12: Registered Retirement Savings Plans (RRSPs)
The Registered Retirement Savings Plan has been around since 1957, but only really started gaining serious attention once the baby boomers started contributing to them in the 80s. Fast forward to 2023 and 6.3 million people made some kind of contribution to their RRSP.
If you’ve ever walked into a bank in February, you’ve been face to face with “RRSP Season” the time of year when institutions spend massive amounts of money trying to convince everyone that contributing to their Registered Retirement Savings Plan is the only possible thing they might want to do with their money.
And it might be, who am I to say? But before you can decide if an RRSP contribution makes sense for you, I want you to understand what it is.
The number one thing I want you to take away from this episode is that an RRSP is a bucket. It’s not a thing you buy, it’s a bucket you open to put money into.
Money goes into that bucket and magically becomes invisible to income tax until you take the money out again. Once it’s in the bucket, it can sit in a savings account, or you can use it to buy things like Guaranteed Investment Certificates, stocks, mutual funds, bonds, and exchange traded funds.
There are a couple of different ways to take money out of the bucket, but you absolutely have to take at least some out by December of the year you turn 72. If you don’t, the government blows a hole in the bucket and money starts coming out anyway.
Okay, there are actually no buckets, no magic, and (unfortunately) zero explosions with RRSPs. They’re accounts that have a specific treatment outlined in the Income Tax Act. But if you earn income, they might be a useful tool to get familiar with.
Who Can Open an RRSP?
Anyone that has earned income that’s been reported on a tax return can open and contribute to an RRSP. My fourteen year old, who had a part time job last summer and who filed their very first income tax return this spring can open an RRSP.
Likewise, my father, who just turned 71 in March, can open an RRSP until December 31st this year.
How Much Can You Contribute to an RRSP?
The simplest way to figure out how much you can contribute to your RRSP is to check the Notice of Assessment you got from the Canada Revenue Agency after you filed last year’s tax return. You have the whole year, plus the first sixty days of the next year, to make a contribution that will count for this year.
Anyone eligible to open an RRSP can contribute 18% of last year’s earned income to it, up to an annual maximum amount that for 2025 is $32,490. Earned income includes money from your job or business (unless you’re incorporated and you pay yourself dividends), and things like disability payments from the Canada Pension Plan and taxable support payments.
It doesn’t include money you receive from government benefits like Old Age Security, or (most) investment income…but it does include net rental income, which surprises me every time I remember that little fact.
When you contribute money to your RRSP, you can choose to deduct that amount from your income to reduce the amount on line 23600 of your income tax return (that’s the line that says how much money you’ll get from income tested benefits and programs like the Canada Child Benefit, Guaranteed Income Supplement, and the Canada Dental Benefit. Generally speaking, the lower your line 23600, the higher your income tested benefits.
Your deduction also reduces the amount on line 26000 of your return, which is the amount of money that you have to pay tax on. Specifically speaking, the bigger your line 26000, the more income tax you pay.
You don’t have to deduct your contribution in the year you make it, by the way. You can save it for sometime in the future, when you might need it more. In fact, you can carry your contribution room forward for the rest of your life if you want to.
Withdrawing From RRSPs Before Retirement
Despite the very noticeable word “retirement” in the name, you can withdraw from your RRSP anytime you want to, but unless it’s to buy a house or go back to school the amount of money you take out of your RRSP will be added to your income for that year and taxed according to our progressive income tax brackets (go back to episode 9 if you want a refresher on how that works).
Any time you withdraw from an RRSP, whoever holds your account is required to hang on to some of the money and send it to the tax man right away. The amount they withhold from you is used to pre-pay your income tax bill at the end of the year, and if they take more than you end up having to pay, you get it back as a refund.
Withdrawing from RRSPs in Retirement
RRSPs weren’t designed to let you avoid paying income tax forever - that’s only for the super wealthy hahahahahahahsob. No, the Canada Revenue Agency is going to make you take money out of your RRSP bucket, by the end of the year you turn 72. Once it comes out of the bucket, it’s taxable.
The way to take money out of RRSPs in retirement is to convert the Registered Retirement Savings Plan bucket into a Registered Retirement Income Fund bucket. Everything about it can stay the same, including the investments you own inside it, but the account number changes and now there’s a little thing called a yearly minimum amount that you have to withdraw before the end of each year. If you don’t do it the CRA makes your bank do it for you.
You can convert your RRSP to a RRIF anytime you want, you don’t have to wait until the end of the year you turn 71 - although if you wait too long, CRA will make it happen.
When you’re taking money out of a RRIF bucket (instead of an RRSP bucket), and you’re over age 65, two things happen that affect how much tax you pay:
You can split up to half of the income with your spouse on your tax returns, if you’re married or common law
You become eligible for the pension income amount, a non-refundable tax credit (that is, a coupon for some amount off of income tax you owe that depends on how much total income you have)
RRSPs and RRIFs at Death
When you die, your RRSP or RRIF goes to the person named on the account as your beneficiary without any tax being withheld. Then, when your final tax return is filed for that year, your RRSP or RRIF is treated as though you withdrew every penny the day you died, and it’s included in your income before tax is calculated. Your estate pays the income tax.
If you have a spouse, and have named them as the beneficiary, there is no income tax to pay (yet) - the entire account rolls over to them, after some special reporting on their tax return. The tax man comes for their share only when they die. The same is true for a beneficiary who’s not your spouse but is a child or grandchild who’s financially dependent on, but they must receive it as an annuity or as a transfer to their Registered Disability Savings Plan
Why is This Important?
You can’t get away from people talking about RRSPs if you’re paying even a little bit of attention, especially in February. Knowing the basics of how they work before someone accosts you at a bank branch or on your for you page on TikTok is a good idea!
Resources
RRSPs and related plans - Canada.ca
The Home Buyers' Plan - Canada.ca