Welcome to our in-depth exploration of the Registered Retirement Savings Plan (RRSP), a vital saving and investment wheel for retirement planning for residents and citizens of Canada.

The Registered Retirement Savings Plan offers an array of investment options, including GICs, stocks, bonds, and mutual funds, providing individuals with diverse avenues to nurture their financial future.

While the interest earned on funds in an Registered Retirement Savings Plan grows tax-free, the RRSP allows for pre-tax contributions, providing immediate tax benefits by reducing your taxable income for the year.

In this comprehensive guide, we will delve into every facet of the RRSP plan, from understanding what is RRSP, RRSP Investment Options, RRSP Contribution Limit, RRSP Contribution Deadline, RRSP Withdrawal and RRSP withholding tax.

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What is RRSP?

The Registered Retirement Savings Plan is a registered retirement plan in which you and your spouse or common-law partner can save and invest to grow money for retirement.

The money in your Registered Retirement Savings Plan account grows tax-free. Furthermore, the RRSP contribution you make is deducted from your taxable income for the tax year.

However, withdrawals you make from the RRSP are taxable.

RRSP Investment options

Depending on the type of RRSP plan you choose, there are multiple investment options available, such as 

• Cash
• Guaranteed Investment Certificates (GICs)
• stocks, bonds, and mutual funds
• ETFs

The money invested in a Registered Retirement Savings Plan in any of these investment options grows tax-free as long as it remains in the RRSP. Withdrawal will incur taxes.

RRSP Contribution Limit

The RRSP contribution limit for 2023 is 18% of the earned income you reported on your tax return in the previous year, up to the maximum limit of $30,780.

Earned income for RRSP

Your earned income is calculated by adding your employment earnings, self-employment earnings, and other types of income (like rental, CPP disability benefits, taxable wage loss benefits, alimony, employee profit sharing), then subtracting specific employment expenses and business or rental losses. 

RRSP unused contribution room

The unused RRSP contribution room can be  found by one of the below modes:

• The RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment.
• Your CRA account
• Phone services by CRA

RRSP Contribution limit for different years

The maximum RRSP contribution limits for different years are given below.

You can find the RRSP contribution limit by referring to the notice of assessment that the Canada Revenue Agency sent you after you filed your tax return. 

Any unused contribution room in the Registered Retirement Savings Plan can be carried forward to the next year, up to the age of 71 years (after which you can no longer maintain a Registered Retirement Savings Plan account).

Therefore, your RRSP contribution limit in any year is equal to the sum of 18% of your earned income you reported in your tax return in the previous year, up to the maximum limit of $30,780, and any unused contributions in the previous years.

Also please note that any contribution to a pension plan or deferred profit sharing plan (DPSP) through your employer during the previous year, will be deducted from your contribution room for the year.

RRSP contribution limit in a year = (18% of your earned income you reported in your tax return in the previous year, up to the maximum limit of $30,780) + (Unused contributions in the previous years)-(contribution to a pension plan or deferred profit sharing plan (DPSP) through your employer during the previous year)

RRSP Contribution Deadline: RRSP Deadline 2023

Contributions to the Registered Retirement Savings Plan account can be made at any time during the year, up until the first 60 days of the following year.

This means the contributions made in the Registered Retirement Savings Plan in the month of January and February in the following year will also be deducted from the taxable income of the current year.

For the tax year 2023, the contribution deadline to Registered Retirement Savings Plan is February 28, 2024.

RRSP Withdrawal

In your Registered Retirement Savings Plan account, money grows tax-free. However, withdrawals are subject to taxation.

You may withdraw funds from your Registered Retirement Savings Plan if it is not locked in. To determine if your RRSP is locked, consult your provider (the financial institution that provided you with the plan).

As long as your Registered Retirement Savings Plan is not locked, you have the flexibility to withdraw funds for any reason at any time. However, funds withdrawn from your Registered Retirement Savings Plan are levied a withholding tax by your provider (the financial institution that provided you with the plan).

At the time of writing this guide, if you are a resident of Canada then the withholding tax is

• 10% (5% in Quebec) on amounts up to $5,000
• 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
• 30% (15% in Quebec) on amounts over $15,000

Additionally, withdrawals from the Registered Retirement Savings Plan are included in your annual taxable income. If this pushes you into a higher tax bracket, it will lead to additional taxes being applied.

Furthermore, withdrawing money from your Registered Retirement Savings Plan disrupts the compounding process within your retirement plan. Once withdrawn, those funds no longer contribute to the growth through compounding.

Hence, withdrawals from Registered Retirement Savings Plan, although allowed at any time for any purpose, should be the last resort when you need money. The main motive of the Registered Retirement Savings Plan is to accumulate your retirement funds.

There are specific plans, such as the Home Buyer’s Plan or the Lifelong Learning Plan, that enable tax-free withdrawals from your Registered Retirement Savings Plan. 

However, in these cases, you must re-deposit the borrowed amount (without any additional interest) within a specified timeframe (up to 15 years for the HBP and up to 10 years for the LLP).

Your repayment period starts in the second year after the year when you first withdrew funds from your Registered Retirement Savings Plan. Think of it as giving yourself a loan.

In fact, in a sense, this practice instills discipline, ensuring you replenish your retirement account with your own funds.

For instance, if you’re purchasing a house and withdraw $50,000 from your Registered Retirement Savings Plan for the down payment, this withdrawal is not taxable as it’s intended for the house purchase. Nevertheless, you must re-deposit the borrowed $50,000 within a set period, typically 2 years. By making recurring monthly payments of around $2000, you can return the borrowed funds to your account. Failure to do so will result in taxes being levied on the unreturned amount.

This system fosters the discipline and purpose behind replenishing your retirement account with your own funds. Ultimately, an RRSP serves as a dedicated retirement savings account.”

RRSP Withholding Tax

Generally, when you withdraw funds from your Registered Retirement Savings Plan before retirement, the financial institution (plan provider) charges a withholding tax on the money that you withdraw.

At the time of writing this guide, if you are a resident of Canada then the withholding tax is

• 10% (5% in Quebec) on amounts up to $5,000
• 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
• 30% (15% in Quebec) on amounts over $15,000

If you are a non-resident of Canada, you will pay a 25% withholding tax rate, regardless of the size of the withdrawal.

This withholding tax is exempted in case you are buying your first house in Canada. I have also saved some money in the Registered Retirement Savings Plan. I plan to take them out at the time of buying my first home in Canada. 

Now it has a different arrangement altogether. I will have to pay the entire amount back in my Registered Retirement Savings Plan within 15 years from the next year I take out the money. However, this is a good practice as it will help me to be disciplined and save the money back in my retirement account.

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