Your RRSP Explained: The Ultimate Guide [2022]

Life is expensive.  In the past few years, the costs for housing, food, daycare, and groceries have all risen substantially. 

Yet deep down, you know there’s something else you should account for, right? 

Your future. 

Your retirement. 

You know you need to save for your retirement and the RRSP is one of the two main registered accounts that can help you do that in Canada.

Although you’ve heard of the RRSP account, you’re probably wondering how it works. 

Your RRSP Explained: Introduction

The RRSP stands for Registered Retirement Savings Plan, which is a registered account that the government created to encourage Canadians to save for retirement.    

A registered account means you get a tax advantage.  An RRSP helps you earn a tax deduction based on your contributions (deposits) and that alone will likely generate a tax refund for the typical 9-to-5 worker.  

Just as they did with our other lovely registered accounts, such as the TFSA and RESP, the government made a silly mistake when naming the account.  They used the word “Savings” in the RRSP name, which causes confusion for many Canadians. 

When people see the word savings, they think “Let me park my cash there.” Or “Which high-interest savings account should I open up?”  

However, all registered accounts, including the RRSP, should be treated as an investment accounts because you can do so much more with it than tuck your savings into it. 

A name like the RRIP (Registered Retirement Investment Plan) would have been more appropriate, but that probably sounded too spooky.

Types of RRSPs

There are a few types of RRSPs:

  1. Individual RRSP.  This is the most common type of RRSP.  It is registered to the person who is contributing to it.
  2. Spousal RRSPs. These RRSPs allow you to contribute money to your spouse’s RRSP, but you claim the tax deduction.
  3. Group RRSPs.  These are employer-run group plans where you and/or your employer contributes to your RRSP via payroll deductions. 

    Some employers may match your contributions up to a specific percentage.  Each dollar your employer contributes is like “free money” and you should take advantage of it if you can.

Who Can Open an RRSP?

Anyone who lives in Canada and has earned income in a previous year can open an RRSP.  RRSP contribution room is created once you make income, so there technically is no age limit. 

At sixteen years old, you can earn income and the very next year you can contribute to your RRSP.  This is contrary to TFSA contributions, where there is a minimum age limit of 18 or 19 depending on where you live in Canada.

Tax Advantages

Your RRSP account offers you a few tax advantages.

  1. Tax Deductions

    When you contribute to your RRSP, you are effectively reducing your taxable income for the year and saving on taxes.  Here is how it works.    

    Suppose you make $60,000 and your tax rate is 30%.  You would owe $18,000 in taxes and your net income would be $42,000. 

    If you contributed $5,000 to your RRSP, then you would lower your taxable income to $55,000.  Your tax rate would still be at 30% because you would still be in the same tax bracket as before.

    Now your income taxes would amount to $16,500 ($55,000 x 30%) and your net income would be $43,500.  The RRSP deduction of $5,000 helped you save $1,500 in taxes, so all things being equal, you will receive a tax refund from the government of $1,500. 

    To take full advantage of this refund, reinvest the $1,500 into your TFSA or RRSP (again) the next year. 
  2. Tax Deferrals

    The RRSP is a tax-deferred account, which is a swanky way of saying you do not pay taxes in the present day, but you will pay them in the future. 

    The ideal time to contribute to an RRSP is when you are earning money in a high tax bracket.

    Then whenever you are making less money (and paying fewer taxes) it is worthwhile to withdraw from your RRSP account.  This usually occurs in retirement, but if you take a one or two-year late-career sabbatical at work, it might be helpful to withdraw money at that point in time.
     
  3. Tax-Sheltered Status

    Another massive advantage afforded by the RRSP is that it provides a tax shelter for any income gained (interest, capital gains, dividends). All your contribution amounts and investments will continue to grow tax-free while the money stays in your RRSP account.   

    If your earned money was in a non-registered cash or margin account, you would have to pay taxes on gains. 

    In an RRSP, if you held the same amount of Royal Bank stock and sold it. You would have the full $900 sitting in your RRSP account ready to be invested elsewhere.  This is one of the powerful features of an RRSP. You can use 100% of your gains to reinvest until you’re ready to withdraw. 
  4. Free Money for a Work (Employer Matching)

    There are not many times that your employer (of all people) will give you “free money”.  The RRSP is one way.  Some companies participate in company-wide plans known as Group RRSPs.

    As mentioned before, employers may match your RRSP contributions to a certain percentage, or even dollar for dollar.  This varies from company to company.  If you contribute $2,000 to your RRSP and your employer does the same on your behalf, you are doubling the contributions towards your retirement (in this case, it would be $4,000 total). 

    Companies do this to attract top talent.  

    Another huge benefit is that in a Group RRSP the company takes your contribution and their contribution straight off your paycheque so that your income gets lowered and you save on taxes right away. 

    You don’t have to wait months for a refund like you might if you invest on your own, it gets applied to your paycheque immediately meaning your money has a longer time to grow.   

RRSP Deadlines

For any tax year, you can choose to contribute to your RRSP up to 60 days into the following calendar year. 

The deadline for contributing to your RRSP and claiming a deduction on your 2021 income tax return would be March 1, 2022. 

In other words, any RRSP contributions you made during the period of March 2, 2021, and March 1, 2022, would be eligible to be deducted from your income tax for the 2021 tax year.  

RRSP Investment Options

You can hold different types of investments in your RRSP, such as

  • Cash
  • GICs
  • Bonds
  • Stocks
  • Exchange-Traded Funds (ETFs)
  • Mutual funds

RRSP Deduction Limit 

The RRSP deduction limit is set at either 18% of your previous year’s income or the maximum allowable amount of $27,830 for 2022.  Your deduction limit will be the lesser amount of the two.

Deduction Limit Maximums By Year (2016-2022)

YearRRSP Deduction Limit ($)
202229,210
202127,830
202027,230
201926,500
201826,230
201726,010
201625,370

Source: CRA Website

The maximum you could make in a year would be $162,277.78 before you hit the maximum RRSP deduction limit amount of $29,210.

Earn an amount higher than that, and you would still only be able to contribute $29,210 (if you had no unused contribution room). 

What if you earned $500,000 as a famous Canadian YouTuber?  The deduction maximum is still $29,210, even though 18% of $500,000 is $90,000.

RRSP Contribution Limit

 Your overall RRSP contribution limit is calculated as:

The current year’s RRSP deduction limit + any unused RRSP contribution room (from previous years)–pension adjustments (we’ll get to these later). 

Your total RRSP contribution limit decreases whenever you contribute (which includes pension payments). 

What counts as income? 

Income can include:

  • Your salary from your job
  • A bonus you receive
  • Rental income (net of expenses)
  • Or business income (net) 

Any unused RRSP contribution room from previous years can be carried forward.  So do not fret about losing contribution room if you cannot contribute your full amount in one year. 

For these examples, the 2021 tax year will be used and all your income is assumed to be earned from your job.     

Simple RRSP Unused Contribution (Carried Forward) Example

Imagine you earned $60,000 in 2020, 18% of that amount would be $10,800, which would become your maximum deduction limit for 2021. 

In 2021, you earned $65,000 making your 2022 deduction limit $11,700.

Assume in both 2020 and 2021 you did not make any RRSP contributions. 

How much are you allowed to contribute to your RRSP in 2022? 

Your 2022 contribution limit = unused contribution room from previous years (2020 and prior, in this case) + your 2022 deduction limit (from your 2021 earnings).

Your 2022 contribution limit = $10,800 + $11,700 = $22,500. 

Remember, your 2022 deduction limit is $11,700.  Yet you could contribute $22,500 to your RRSP because of your unused (or carried forward) contribution room.  

Remember, your overall RRSP deduction limit may not always match your RRSP contribution limit for a specific year because of unused contribution room. 

RRSP Partial Contribution Example

Now imagine you have a $16,000 deduction limit for 2021.

You make an RRSP contribution of $6,000 in 2021, which leaves you with $10,000 in unused contribution room to carry forward into 2022. 

You also made $100,000 in 2021, making your 2022 deduction limit $18,000.  

Your 2022 contribution limit = unused contribution room from previous years (2021) + your 2022 deduction limit. 

Your 2022 contribution limit = $10,000 + $18,000 = $28,000. 

You gain unused contribution room in any year that you were working, and you didn’t contribute the full amount to your RRSP as dictated by your deduction limit. 

If you earned $50,000 in the previous year, that means your deduction limit for the current year would be $9,000 (18% of your earned income).

If you only contributed $2,000 to your RRSP, then you would have $7,000 in unused contribution room for the next year.

Pension Adjustments

A pension adjustment reduces your deduction limit for a specific year.  There are two types of defined pension plans: 

a. defined benefit plan and 

b. defined contribution plan

The pension adjustment calculation for defined benefit pension plans is complicated and depends on how the pension benefit is calculated. 

The pension adjustment calculation for a defined contribution pension plan is much easier to calculate.  You deduct your contribution and your employer’s contribution to your pension for the year from your deduction limit. 

If you made $70,000 in 2021, that would make your deduction limit $12,600 (18% of $70,000) for 2022. 

If you and your employer contributed $3,500 each (for a $7,000 total) to your defined contribution pension plan in 2021, then that $7,000 would be subtracted from your deduction limit of $12,600. 

That would mean you would only have $5,600 to contribute to your own for towards your individual RRSP plan.  The $7,000 is known as the pension adjustment in this scenario. 

Don’t sweat that minor fact that your employer’s contributions are limiting your contribution room. You’re getting free money. 

Unclaimed RRSP Contribution 

Another strategy for you to use is to contribute to your RRSP but wait on claiming it as a tax deduction for that year. 

Yes, that is correct. 

You do not have to deduct your full contribution amount in the same year that you contribute.  In the example above, you could contribute the $5,600 leftover after the pension adjustment but not claim it for the 2021 tax year.

You would not generate a refund initially, but you could claim the tax deduction in a future year.  You would only typically do this if you thought you were going to experience large salary increases in the next few years and jump into a higher tax bracket. 

Once you were earning a salary that qualified you for a higher tax bracket, you could claim the $5,600 as a tax deduction in whatever future tax year you are in (say, the 2024 tax year). 

How to Find Your RRSP Contribution Limit

The easiest way to figure out how much you can contribute to an RRSP is to look at your Notice of Assessment from the CRA.   It will tell you your exact RRSP deduction limit, and how much unused contribution room you have from previous years.

You can check this data by using the CRA My Account online. 

RRSP Over Contribution (OC) Penalty

It’s difficult to track your RRSP contributions. So it is quite possible that you may one day accidentally over-contribute to your RRSP.  As you will see, the penalties are steep.

An Exemption

First, some good news.

The Canada Revenue Agency (CRA) will allow you to over contribute to your RRSP by $2,000 during your lifetime without incurring a tax penalty. 

However, you will not receive a tax deduction for the $2,000 excess amount you contribute. 

RRSP Penalty Box

If you contribute one dollar over the above $2,000 limit, the CRA will start applying a 1% tax on the excess amount per month for as long as you stay in an excess state. 

However, you will no longer be charged the 1% excess tax per month if you withdraw the excess amount. 

As with the TFSA, you can ask the CRA to consider waiving the excess 1% tax penalty if you can write a persuasive letter explaining how you:

  • Over contributed by mistake and it was a reasonable error 
  • Have gone about eliminating the RRSP over-contribution 

You have to a file a separate T1-OVP Individual Tax Return in order to pay the penalty you owe.  You must pay your RRSP OC penalty within the first 90 days after the year-end  in which you over contributed.

After that time, you will be subject to late-filing penalties.

The late-filing penalty is rather hefty at 5% of your balance owing + 1% of your balance owing for each month that your return is late (for up to one year). 

Do Investment Gains or Losses Affect my Contribution Limit?

No, capital gains, income or dividends received or losses incurred do not affect RRSP contribution room limits at all. 

That is great news if you keep earning money off your investments.  If your RRSP deduction limit for 2022 is $10,000 and you made $4,000 in investment income in 2021, your deduction limit is still $10,000.

If you lose money, you do not get to make up the difference with extra contributions, though.  So if your deduction limit is $10,000 for 2022 and you lost $5,000 in the stock market in 2021, your deduction limit does not increase to $15,000 for 2022. 

Investing in risky stocks is a huge mistake in your RRSP.  An RRSP should not be used for risky stock picks, because you lose valuable contribution room if a stock pick goes down and you end up selling it at a loss.

RRSP Contribution and Tax Deduction Example

In the chart below, you can see how much you can save on taxes by making $5,000 worth of RRSP contributions at different incomes levels. 

These scenarios are to be used only to illustrate the concept of tax savings.  Your actual tax savings will depend on a lot of individual factors, and you should speak to a licensed tax accountant or specialist if you seek individual advice. 

There are three income levels below: $40,000, $60,000 and $90,000.  Each income level includes one scenario where you do not make RRSP contributions and another scenario where you make RRSP contributions.  The amount of taxes you pay and your net income for the year are also listed. 

Marginal tax rate of 20%, 30% and 40% are applied to the $40,000, $60,000 and $90,000 income levels, respectively.

When you contribute to your RRSP, you can deduct the amount from your gross income. This effectively lowers your income for the year.  So you end up paying fewer taxes. 

At the $40,000 income level, you would fall in the 20% marginal tax bracket and pay $8,000 in taxes normally.

When you contribute $5,000 to your RRSP, the CRA allows you to calculate your taxes as though you only made $35,000 for the year.  At a 20% tax rate, you only pay $7,000 in taxes overall, for savings of $1,000 in taxes paid. 

Overall, your net income rises to $33,000 from the $32,000 in the original scenario.

The process is repeated for the $60,000 and $90,000 levels with the different marginal tax rates.

At $5,000, an RRSP contribution would save you:

  • $1,500 in taxes if you were in the 30% marginal tax bracket
  • $2,000 in taxes if you were in the 40% marginal tax bracket

You receive a higher tax deduction with the same contribution amount when your income is higher.  So high-income earners benefit more from RRSP contributions than low-income earners. 

Gross
Income ($)
RRSP
Deduction ($)
Taxable
Income ($)
Tax
Rate (%)
Taxes ($)Net
Income ($)
40,00040,000208,00032,000
40,0005,00035,000207,00033,000
60,0000  60,0003018,00042,000
60,0005,00055,0003016,50043,500
90,00090,0004036,00054,000
90,0005,00085,0004034,00056,000

RRSP Withholding Taxes on Withdrawals

Since the RRSP is a tax-deferred account, money is taxed when you withdraw funds.   The amount withdrawn is added to your earned income for the current year, making it 100% taxable, just like the earnings from your regular job. 

So if you earned $50,000 at your job, and you withdrew $20,000 out of your RRSP as well, then your total income earned in the eyes of the CRA would be $70,000.  This means you will end up paying a higher amount of taxes.

More importantly, unlike a TFSA, you will also lose the contribution room for that $20,000 withdrawal forever.  

There are two components to the taxes on RRSP withdrawals: your marginal tax rate and the withholding tax rate.

How RRSP Withholding Taxes Work 

Your financial institution will withhold a portion of your RRSP withdrawal money in order to pay for some or all of the taxes you owe.  The rates depend on your residency and how much you are withdrawing.  The tax rates are as follows:

  • 10% on amounts up to $5,000
  • 20% on amounts between $5,001 to $15,000
  • 30% on amounts above $15,000

In Quebec, the tax rates are:

  • 5% on amounts up to $5,000
  • 10% on amounts between $5,001 to $15,000
  • 15% on amounts above $15,000

Please note that you will also have provincial taxes withheld. 

If you withdrew $4,000 out of your RRSP, and you lived in British Columbia, you would pay 10% ($400) as a withholding tax straight off the bat.  Meaning you would only receive $3,600 from an RRSP withdrawal of $4,000. 

The $4,000 is added to your regular income for the tax year, and when you file your taxes, the government will calculate how much in taxes you actually owe for your entire withdrawal (based on your overall income) and either refund or make you pay the difference. 

Suppose you earn $70,000 at your job and you are in the 30% marginal rate tax bracket. The extra $4,000 in RRSP withdrawals would bump your taxable income up to $74,000.  

Based on your income tax filing, you will pay $1,200 ($4,000 * 30%) in taxes for the $4,000 withdrawal.  However, you only paid $400 in withholding taxes. 

Therefore, when you file your income tax return, you will end up owing another $800 in taxes. 

You are taxed once right away upon withdrawal ($400) and then a second time when filing your taxes ($800).  The result is the same $1,200 in taxes being owed.

There is a lot of confusion about the withholding taxes and RRSPs.  Some people think it is a penalty for early withdrawal. The withholding tax is not a penalty

It is simply part of a system where the government claims their stake for the tax breaks you received many years ago when you first made your RRSP contributions. 

The best way to think of the RRSP is that you are partnering with the government in the account.  

Your partner allows you to receive a tax break on funds being contributed to an RRSP.  That extra money grows tax-free for years, even decades. 

However, when you withdraw funds from your RRSP, the government, as your partner, will claim their cut of the profits.  

It’s kind of like the government saying “Hey remember that money we didn’t tax you on years ago?  Well, now we’ve come for our portion”. 

If you have a market value in your RRSP account of $200,000, remember you are not going to be able to take out the full $200,000 because the government wants their portion back. 

The RRSP is an account that is “mostly your money, and partially the government’s money.” 

Sometimes people run into tax problems when they are retiring and they have a large RRSP sum and a pension.  There are strategies to reduce the amount of taxes you would have to pay, but they require planning. 

Some people aim to have a small RRSP because they hear about the potential tax problems they may have in the future.  However, that is flawed thinking. 

Think of it this way. 

 Would you rather have $700,000 in your RRSP account and pay 30% or 40% in taxes upon withdrawal throughout your retirement?

Or would you rather have an account worth $100,000 and only pay a 20% tax rate, because you under-funded your RRSP your whole life due to fear of paying taxes? 

Don’t let the fear of paying taxes stop you from the biggest benefit the RRSP gives you.  It allows you to amplify your contributions at an early age, giving them more time to grow as investments to help you fund a comfortable retirement for yourself.  

The Costly Early Withdrawal

There are no extra tax penalties for making early withdrawals from your RRSP despite popular myths to the contrary.

However, there is a potentially significant cost in withdrawing funds early because you do not get the contribution room back ever, as you would in a TFSA.  

That means that you lose one of the major benefits of the RRSP, the tax-sheltered growth that occurs on gains inside the account. 

Suppose you contribute $5,000 into your RRSP at 25 and buy an index fund that grows at an average of 5% per year until you withdraw it when you are thirty.  In five years, your original amount of $5,000 would grow to $6,381.  Nice.

However, once you withdraw the $5,000, you can never re-deposit it into your RRSP again.

If you had left it untouched until you retired at the age of 60, at an average growth rate of 5% per year, you would have seen your account grow to $27,580, or $21,199 more than the instance where you withdrew the money at 30 years old. 

Now if you took that $6,381 and started a business and it returned you $35,000 after taxes, then you don’t have to feel too bad about your decision. 

If you bought a piano and then stopped playing within a year, then consider it a life lesson.

 RRSP: Timely Withdrawals 

There are a few life scenarios where you can withdraw from your RRSP much earlier than retirement age and pay very little in taxes:

  • When you are unemployed for an extended amount of time.
  • When you are going back to school.
  • When you take an extended leave from work.

Remember, you don’t want to withdraw too much money early from your RRSP because you cannot re-contribute it to the account ever again. 

Withdrawing Money Tax-Free from Your RRSP

There are two instances where you can withdraw money tax-free from your RRSP.  When you:

  • Are a first-time homebuyer.
  • Are going back to school or upgrading your skills for work. 

1. RRSP Homebuyers’ Plan (HBP)

Subject to a few rules, you can use RRSP funds to help you purchase a home in Canada if you qualify as a first-time buyer. 

You can take out up to $35,000 per spouse (or $70,000 total) to use as a down payment in order to purchase a house.  In order for the home to qualify for the Home Buyers’ Plan, you must purchase your house before October 1st of the year following your RRSP withdrawal.

Another eligibility factor is that you are only considered a first-time homebuyer if, in the previous four-year period, you have not lived in a home that you, or your current spouse / common-law partner, has owned. 

The four-year period begins on January 1st of the fourth year prior to your fund withdrawal and ends 31 days prior to your fund withdrawal. 

If you withdraw funds for the Home Buyers’ Plan on July 31, 2022, then technically four years prior would be July 31, 2018.  

However, the Home Buyer’s Plan states that the four-year period begins on January 1st of the fourth year prior to your fund withdrawal, which means you could not have been in a home owned by yourself or your spouse/common-law partner from January 1, 2018, to June 30, 2022.

You will start making repayments at the end of the first year after the funds were withdrawn, at a value of 1/15th of the withdrawal amount.  This will happen annually, and you have to pay back that full RRSP amount you withdrew within 15 years. 

If you miss a payment, the withdrawal is treated as taxable income.

There are a few other rules around the Homebuyer’s Plan.  Your contribution to your RRSP must have been made at least 90 days prior to you withdrawing from the Homebuyer’s Plan.  

The house you purchase must be your primary residence for at least the first year and you must be a resident of Canada when you are withdrawing funds from your RRSP under the Home Buyers’ Plan.

In order to withdraw funds from your RRSP for the Home Buyers’ Plan, you will need to fill out Form T1036

The Home Buyers’ Plan allows you to receive a tax refund based on your contributions, and it allows you to withdraw the money tax-free from the RRSP.  However, it may not be a good option for a potential homebuyer. 

Remember that you will have to pay back the full withdrawn amount within 15 years.  It may prove more difficult for you to pay back your RRSP money once you are also carrying a mortgage. 

The bigger issue is that your RRSP is a retirement account that is helping you save for your retirement.  Your money is best served by being allowed to grow and compound tax-free.

The minute you withdraw money out of your RRSP, you set your future self back by potentially hundreds of thousands of dollars in investment gains. 

If you can, please consider using a savings account or TFSA to fund a house down payment and leave your RRSP alone.   

2. Lifelong Learning Plan (LLP) 

Ever get the feeling that you need to up your education game, but you don’t have the funds available outside your RRSP?  Well, you’re in luck because the government has a program for you.  

Yes, you.  

The Lifelong Learning Plan (LLP) allows you to withdraw RRSP funds to help pay for full-time education or training for you or your spouse/common-law partner.  

In order to use the LLP, you have to be a Canadian resident with an RRSP account.  

You cannot take out funds for your children’s education from the RRSP. There is another registered account for that, called the RESP

The LLP allows you to take out up to $20,000 per spouse in total (maximum $10,000 per year).  The withdrawals can occur over four years.

There are some rules to follow.

You must enroll in classes before March of the year following your LLP withdrawal.

Also, your education has to take place in a designated education institution that has been certified by Employment and Social Development Canada (EDSC). 

Canadian universities or colleges are included and even education institutions that improve your technical or occupational skills.

If you live in Canada and commute to a university or college in the United States, you may also qualify for the LLP.  You can read more about which institutions can help you qualify for the LLP here.  

When you withdraw funds under the LLP, you do not add the withdrawn amount to your income, and you will not have any tax withheld by your financial issuer. 

You have 10 years to make repayments, at a rate of 1/10th per year.  So if you took out the $10,000, you would have to pay $1,000 back each year, for 10 years. 

If you miss a repayment, the total ($1,000 in this fictional scenario) will be added to your income by the CRA and taxed as regular income for that year. 

The repayments start in the first year you are not in school or 5 years after you started the Lifelong Learning Plan. 

Shutting it Down: Closing an RRSP at 71

You can contribute to your RRSP until the end of the year in which you turn 71 years old.  Then the Canadian Government says “it’s time to close that RRSP of yours.” 

So what are you to do? 

Well, you can

  • Withdraw all or some of that money as cash.
  • Purchase an annuity.
  • Convert your RRSP into a Registered Retirement Income Fund (RRIF). 

The RRIF requires individuals to withdraw a minimum amount each year, which is known as minimum income.  There is a formula for determining how much you have to take out, and if you’re in the age range of 65–70 years old, the percentage of your entire RRIF balance that you need to withdraw is between 4% and 5% per year.  

The older you get, the higher the percentage you are required to withdraw.   So if your RRIF balance is $200,000 and you are 70 years old, you would need to take out 200,000 * 0.05 = $10,000 at a minimum for that year.  

Keep in mind that withdrawing money from your RRSP is 100% taxable as regular income, so you will need to do some tax planning. 

You can also contribute to a spouse’s or common-law partner’s RRSP until the end of the year that they turn 71. 

Spousal RRSP*

*We should note that the Spousal RRSP also includes anyone in a common-law relationship.

This is a strategy that allows the high-income earner (contributor) in a couple to make a contribution to their spouse’s (annuitant’s) RRSP.   Typically, an annuitant earns less money and is in a lower tax bracket. 

The contributor uses and loses their contribution room, but gets the benefit of a tax deduction. 

The annuitant receives the RRSP contribution and now has funds deposited in their RRSP, despite not actually contributing to it themselves. The annuitant’s contribution limit is not affected by the higher income earners’ contribution to their RRSP account for the year. 

This is a form of income splitting and generally results in lower taxes for the family unit.

When the funds are withdrawn out of the lower-income spouse’s RRSP account, their income will still be low, resulting in fewer taxes. 

The annuitant may not have much money to contribute to an RRSP, and having the higher income spouse make contributions on their behalf helps to build both accounts for retirement. 

An emotional benefit is that the lower-earning spouse can feel appreciated and secure knowing that they are saving for retirement. 

This strategy also helps the household equalize their retirement income, which will be beneficial in reducing the amount of potential OAS clawbacks once retired.

It is much better to have two spouses or partners earning within the same tax bracket than having one person earn $130,000 while the other earns $10,000 in retirement. 

All things being equal, a couple in the latter situation will end up paying more in taxes than the situation where both partners are earning $70,000 each in retirement. 

RRSP Spousal Transfer

You cannot transfer funds from your personal RRSP account directly into a spousal RRSP. 

RRSP Beneficiaries

You can name someone as either a revocable or irrevocable RRSP beneficiary.

If you want the option to change your RRSP beneficiary anytime you want, that is called a revocable beneficiary. 

If you have named an irrevocable beneficiary, you cannot change them out of their “beneficiary” status without their consent.  You also cannot withdraw funds without their consent. 

Typical choices for beneficiaries are a spouse / common-law partner or a dependent child or grandchild who is under the age of 18.  However, anyone can be named a beneficiary.     

There are tax considerations to consider when naming a beneficiary.  When someone dies, the full RRSP value (of fair market value) is included in the income of the deceased person and taxed at their marginal rate. 

That can lead to an exceptionally high tax bill for the beneficiary (if no beneficiary was named) or estate (if no beneficiary was named) unless they are:

1.  A spouse or common-law partner

2.  A financially dependent child or grandchild younger than 18 years old

3.  A financially dependent child or grandchild of any age that is infirm 

Your RRSP and the Magical T1213 Form

When I finally stopped watching Fresh Prince and Bachelor in Paradise reruns and got more “into” personal finance, a thought crossed my mind.  

Is there a way that I could save going through the hassle of contributing to my RRSP, in, say, November or December of one year and then having to wait until March or April of the next year to get my tax refund?

It just seemed like I was giving the government money for months at a time without receiving any benefit for it.  

Well, it turns out that there is an amazing way to reduce your taxes, and in effect, get your “refund” instantly.   This is known as reducing your taxes at the source.

To do this, you will need to fill out the T1213 form which is found on the Canada Revenue Agency website.  

You fill in the form and send all the documentation necessary to your Taxpayer Services Regional Correspondence Centre.  Don’t worry, the addresses in your province or territory are listed on the last page of the form.

You will have to get proof of the payment arrangement from your RRSP provider (most likely it will be a bank).  

The CRA will review the application and send you a letter that you can take to your HR Department telling them to reduce the amount of taxes you have to pay each paycheque because you are contributing a certain amount ($100, or $150 etc.) to an RRSP every pay period. 

Before setting up these automatic RRSP withdrawals, you were loaning the government money for a few months at a time when you did your usual lump sum payment in January or February.

If you ever receive an RRSP tax refund, that meant that you paid too much in taxes throughout the year and you essentially you made an interest-free loan to the government.  The tax refund you receive is just the payment owed to you by the government for paying more in taxes than you should have during the year.

The government and your employer estimate your taxes for the year based on your salary.  Each pay period there are taxes withheld (automatically taken out) from your paycheque.  The government does not know if you will make an RRSP contribution for the year. 

Once you file your taxes and they see you have made an RRSP contribution, they adjust you to your lower income and issue a tax refund. 

By filling in a T1213 form, you are still contributing to your RRSP but also reducing your taxes at the exact same time, at the source (ie. when you get paid by your employer).  So you receive your “mini-refunds” sooner. 

 That’s a win-win for the present and the future. 

When Should I Send in my T1213 Form? 

It seems that you need to jump through hoops for anything good.  The T1213 is beneficial but you need to fill the form out each year to let the government know that you want to continue.  Even if nothing has changed from the previous year.  

You should try sending in your T1213 Form in the early Fall for the upcoming year to give the CRA a chance to process the request and give you the letter you need to take to your HR Department. 

RRSP Explained Conclusion 

The RRSP is a great investing tool to help you reach your retirement goals.  To summarize the benefits:

  1. You receive a tax deduction based on the size of your contribution and your marginal tax rate, which means you save more money today. 
  2. Your investment growth is tax-sheltered so any income gains can exponentially compound tax-free, until withdrawal time.
     
  3. You can pay into your spouse’s or common-law partner’s RRSP and claim that contribution room too, which is a good way to income split in a household.

How much of your RRSP contribution room do you use per year?  If you have a sizeable RRSP nest egg right now, have you given any thought to how you are going to draw it down in retirement?  Let us know in the comments below. 

RRSP Explained FAQs

What is an RRSP in simple terms?

The Registered Retirement Savings Plan (RRSP) is a savings/investment account that you or your spouse/common-law partner can contribute to for the purpose of retirement. It offers tax advantages such as giving you a tax deduction in the year you contribute, and tax-free investment gains so long as the funds remain in your account.  Your withdrawals will be taxed as income upon withdrawal.

Can I withdraw my RRSP?

As long as your funds are not locked into an investment (Guaranteed Investment Certificates) you can withdraw RRSP funds whenever you want to.  You will pay withholding taxes immediately, and you may owe more (or less) in taxes when you file them that year.  The real drawback to withdrawing from your RRSP early in life is the permanent loss of contribution room. The only exceptions are when you make withdrawals for certain scenarios like the Home Buyers’ Plan and Lifelong Learning Plan.

What happens to your RRSP when you retire?

If you retire anytime before 71, your RRSP remains an RRSP account.  However, by December 31st of the year you turn 71, you need to convert your RRSP into a Registered Retirement Income Fund (RRIF).  At that point the government mandates a certain percentage of funds that you must withdraw each year.  If you have a huge RRSP account balance this can lead to large tax bills, depending on your other retirement income sources.

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