RSPs Made Easy: How They Work and Why You Need Them



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RSP in Canada

People often mistake a Registered Retirement Saving Plan (RRSP) for Retirement Saving Plan (RSP). Although they are both aimed towards retirement, they’re different. While a Retirement Savings Plan (RSP) refers to several retirement accounts, a Registered Retirement Saving Plan (RRSP) relates precisely to one account type.

One of the most significant tax advantages of an RSP is that the CRA can deduct any contributions from your income. Let’s take a look at RSP and what it entails.

Retirement Savings Plan Meaning

A Retirement Savings Plan is an umbrella of different accounts Canadians use to contribute and save money for retirement. Other RSPs include accounts like Tax-Free Savings Account (TFSA), a Registered Pension Plan (RPP), which have defined benefit pension plans, defined contribution pension plans, and non-registered (or taxable) accounts.

Depending on the type of plan you want to contribute to, RSPs can include investments like stocks, bonds, mutual funds, ETFs, GICs, and saving accounts. You can register for any RSP via Canada Revenue Agency (CRA).

Contributions towards any of the plans are tax-deductible depending on the marginal tax rate when you fund your account. You can defer paying tax on the money in any of the plans and any interest it accrues until you withdraw it,

You can defer paying tax on the money and any interest it gains until you withdraw it, probably in retirement. When you withdraw, the CRA will consider it as income, and you’ll be required to pay taxes on it according to your marginal tax rate at the time of withdrawal.

The RSP contribution limit for 2023 is 18% of earned income an individual report on their tax return in the past year, up to a maximum of CA$27,830. For those with a company pension plan, the CRA will reduce their RSP contribution.

The CRA automatically forwards any unused contribution room indefinitely. You can view your available space by checking your previous year’s Notice of Assessment. Bear in mind that the CRA will penalize you if you overcontribute.

Currently, there is no starting age limit for RSP. Anyone that has earned income and filed their tax return can contribute to an RSP the following year.

RSPs have no starting age limit; anyone who has earned income and filed a tax return can donate to an RSP the following year. The CRA requires you to convert your RSPs to a Retirement Income Fund (RIF) by the end of the year your turn 71. When you do this, you must withdraw a certain amount of money from your RRIF yearly.

Types of RSPs

Several types of retirement saving plans come with unique tax advantages. Below are some retirement plans, their features, and perks.

Registered Retirement Savings Plan (RRSP)

Registered Retirement Savings Plans are the most prominent RSP out there. This is because they offer some of the most attractive tax advantages. All contributions in this plan are deductible from your annual taxable income.

However, any earnings on savings or investments held within an RRSP are not taxable until you make a withdrawal. Within the RRSP, you can keep several assets, including savings accounts, GICs, stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs).

Generally, you can contribute up to 18% of your previous year’s earnings within the RRSP. You can also forward any unused contribution to subsequent years.

Since RRSPs aim to provide a source of income in retirement, the CRA will penalize you if you withdraw funds before you retire. However, exceptions exist, like the Home Buyers Plan (HBP) and Lifelong Learning Plan (LLP).

These plans allow you to borrow a certain amount from your RRSP tax-free to help off your first home payment or pay for full-time post-secondary education. The CRA recommends converting your RRSP into a Registered Retirement Income Fund (RRIF) the year you turn 71.

Note that all RRSP/RRIF withdrawals, even in retirement, are subject to income tax. If you want to be in a lower tax bracket during retirement, then the RRSP is suitable for you as it is a tax-advantageous retirement savings plan.

Registered Pension Plan (RPP)

Often referred to as an employer-sponsored or corporate pension, a Registered Pension Plan (RPP) is a retirement savings plan that your employer establishes on your behalf. There are currently two types of Registered Pension Plans, they are:

  • Defined Benefit (DB)

A defined benefit RPP is a specific monthly wage your employer promises to pay you in retirement. A calculator that calculates your age, years of service, and income level determines the amount due.

Often, an employer bears the entire pension cost, such as making all the donations and investing them on behalf of plan members. While in some other defined benefit plans, you may split contributions with your employer.

  • Defined Contribution (DC)

A defined contribution RPP is like an RRSP. This plan allows you to choose how to invest your contributions and your pension income in retirement based on long-term goals. You can invest monthly contributions in your DC plan, which will be taken out of your paycheque. There is also a matching program where your employer contributes a percentage of your donation.

All contributions you make towards your RPP cut into your annual RRSP contribution room. This is also known as a pension adjustment, and the CRA automatically includes it in your RRSP contribution room calculation on your yearly tax assessment statement.

If you leave your employer before retirement, you can either remain a member of the RPP and receive your pension at retirement or choose to collect a commuted value of the pension. If applicable, you can reinvest it in a Locked-In Retirement Account (LIRA) or another employer’s RPP.

Tax-Free Savings Account (TFSA)

Tax-free savings accounts are one of the most prominent registered accounts in Canada. A TFSA  is not meant for retirement alone; you can use it for any purpose. All savings and investment earnings within  TFSA are tax-free, and withdrawal is tax-free.

It is an excellent way to increase cash flow in retirement while minimizing taxes and potential claw-backs on income-tested benefits like Old Age Security (OAS).

Like RRSPs, TFSAs can hold various assets like savings accounts, GICs, stocks, bonds, mutual funds, and Exchange Traded Funds (ETFs). TFSA contribution room is a regular annual amount for all individuals, and you can forward it to the next year if unused.

There are penalties if you overcontribute, though any withdrawals from a TFSA are added back to your contribution room in the subsequent year.

With TFSA, there is no tax deduction when you contribute, but you pay no income tax on withdrawals. TFSAs can be excellent retirement savings plans for people who expect to be in a higher bracket during retirement than in service.

Non-Registered Account

A non-registered account is strictly not for retirement savings; it includes any savings or investment plan not held within a registered account, for example, RRSP, RDSP, TFSA, RESP, etc.

These types of accounts have room for additional income. If you have used all your contributions room for all applicable registered accounts, a non-registered account will give you other ways to invest and save money and provide retirement income.

However, non-registered accounts are not tax-advantageous; all investment or investment earnings garnered within them must be declared income on your annual tax return. Nonetheless, for those eligible, their dividends and capital gains are taxed at a more considerable rate than interest income.

No contribution limits or rules currently govern the amount or period you must withdraw funds. This helps you save and invest longer. The fund in your non-registered account is liable to tax deductions if you borrow to invest. The interest charges on the loan can be deducted from your annual taxable income.

Claiming RSP on Income Tax

You can claim RSP on your income tax, depending on the plan you invest your money in. If you contribute to an RRSP, you get a tax deduction that decreases your annual income by the amount of your contribution. Remember that not all RSP contributions allow you to claim tax deductions.

For example, any contribution to your TFSA is made with after-tax funds; hence you don’t get an instant tax benefit on it. The perks come later when it’s time to withdraw the funds. Also, any interest within your TFSA is tax-free, even upon withdrawal.

Any contributions made to non-registered accounts do not get any tax benefits. This is why most people usually use up their available RRSP and TFSA room before opening a non-registered account for investing purposes.

 Although you cannot claim tax deductions for contributing to a non-registered RSP, there are other tax deductions like capital gains which the CRA tax at 50% of your marginal tax rate. Contrarily, you can use capital losses to offset capital gain by backdating it three years and forwarding it up to ten years.

Any contribution you make to an RRP impacts your RRSP contribution room via the pension adjustment (PA). Yearly, the CRA requires you to report your pension contributions and pension adjustment on your T4 slip. Below is a table showing which RSP is tax-deductible and which is  not:

Retirement Savings Plan (RSP)Tax-Deductible 
Registered Retirement Savings Plan (RRSP)Yes
Registered Pension Plan (RPP)Yes
Tax-Free Savings Account (TFSA)Yes
Non-Registered AccountNo

What is the Difference between RSP and RRSP?

RSP stands for Registered Savings Plan, while RRSP stands for Registered Retirement Savings Plan. The key difference between the two is their intended purpose.

An RSP is a general term used to describe any type of registered savings plan in Canada, including RRSPs, as well as other types of plans such as Registered Education Savings Plans (RESPs) and Tax-Free Savings Accounts (TFSAs). RSPs are designed to help Canadians save money for a variety of goals, such as retirement, education, and purchasing a home.

An RRSP, on the other hand, is a specific type of RSP that is specifically designed to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, which means that they can be used to reduce your taxable income in the year in which they are made. The money inside an RRSP grows tax-free until it is withdrawn, at which point it is taxed as income.

Final Thoughts

There is no best retirement plan as each has its perks and is designed to complement the other. No plan currently offers everything you need; it is advisable to split out your savings and investment so they can come in handy when you need them – during retirement.

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Kareena Maya

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.