What Is a Registered Retirement Savings Plan (RRSP) And Should You Open One?

Retirement may be decades away, but the earlier you begin saving, the more you can earn, thanks to the power of compound interest. In Canada, one of the best ways you can grow your retirement nest egg is by opening a registered retirement savings plan.

This tax-advantaged savings plan lets Canadian residents contribute to their retirement fund years in advance, without worrying about paying tax on any growth — as long as the money remains in the savings account.

If you’re interested in opening a registered retirement savings plan, but not sure if this investment type is right for you, here’s everything you need to know about Canada’s main retirement savings option.

What is an RRSP (Registered Retirement Savings Plan)?

A registered retirement savings plan is the main type of retirement investment plan that both employees and the self-employed can open and contribute to in Canada. You contribute pre-tax dollars into this retirement fund, and your money can then be invested in a number of different ways. An RRSP may be managed by a brokerage or investment firm, or it may be self-directed and managed independently by the plan owner.

Every RRSP is registered with the Canadian government. The Canadian Revenue Agency (CRA) sets yearly contribution limits and tax laws for registered retirement savings plans.

How do registered retirement savings plans work?

Similar to 401(k)s or IRAs (individual retirement accounts) in the United States, RRSPs offer a few key advantages. First, you can contribute pretax dollars into these accounts, allowing you to potentially deposit a bit more from your paycheck than you could post-tax. Secondly, you can deduct any contributions from your taxable income each year, potentially lowering your tax liability. And lastly, any returns you earn on your money while its growing in your account remains tax-free until you make your first withdrawal.

Although you have to pay taxes when you withdraw from your account during retirement, typically, your marginal tax rate is lower than when you were working. This means you’re likely to pay less in taxes than if you were taxed during your employment years.

What are the 2024 RRSP contribution limits?

For tax year 2024, you can contribute $31,560 into your registered retirement savings plan. This is up by almost $1,000 — the 2023 contribution limit was $30,780. The contribution amount generally increases each year and is impacted by the inflation rate.

You can typically make excessive transactions of $2,000 per year without facing a penalty — but only if you’re eighteen or older.

One unique characteristic of a retirement savings plan is that if you don’t maximize your contributions in a given year, you can carry any contribution room left forward.

For example, if you had $10,000 left in contribution room in 2023, you can roll that into the 2024 limit, giving you room to contribute up to $42,780 (2024 annual limit + unused contribution room from 2023 + the $2,000 excessive transaction allowance).

What is the lifetime contribution limit for a registered retirement savings plan

Unlike other savings account plans in Canada, there is no lifetime contribution limit. You just have to stick to the yearly limits (plus any carried-over contribution room and the excessive contribution limit). But you never “max out” after hitting a certain lifetime contribution amount.

RRSP age limits

You can contribute to a registered retirement savings plan at any age, though you don’t receive certain benefits until you reach eighteen. For instance, you may not be eligible for an employment match if you’re underage (though it’s possible if you’re employed). You also cannot make excessive contributions until you’re eighteen.

You’re allowed to contribute to your RRSP until December 31 of the year you turn seventy-one. However, the average retirement age in Canada is much sooner — 65.1 years of age, according to a 2023 study.

Types of registered retirement savings plans

Though most RRSPs have similar terms, there are a few different types available.

Individual registered retirement savings plan

This type of RRSP is set up by an individual person. The individual who opens the savings account is both the account owner and contributor into the plan.

Group registered retirement savings plan

A group RRSP is most similar to a 401(k) plan in the US. This savings option is established by an employer, which allows the employee to contribute pretax money directly from their paycheck. The employer may choose to offer a contribution match, a benefit that can help individuals grow their money faster.

Spousal registered retirement savings plan

This RRSP is designed for married partners. It can provide benefits for one spouse while also offering tax benefits for both. In this type of savings plan, the higher-earner spouse, also called the spousal contributor, can contribute to this fund on behalf of their spouse.

Pooled registered retirement savings plan

If you’re self-employed or are an employee or owner of a small business, you can open a pooled RRSP to enjoy more tax benefits.

Is an RRSP a Savings or Investment Fund?

How you set up an RRSP will determine whether it serves more as a savings or investment account. For instance, you can set up your RRSP solely as a savings account to earn interest on your balance. But you can also invest your money to help it grow faster.

While establishing your RRSP as a savings account can be safer — you’ll earn interest and won’t have to worry about losing funds — it’s not the best way to grow money for your future. You’ll be able to earn much more by investing all or part of the money in your RRSP.

You don’t have to choose, though. You can have some of your funds invested, while the rest are placed into a savings account.

What types of accounts can you invest your RRSP in?

Here are a few ways you can grow and invest the money you contribute to your registered retirement savings plan:

• Savings account

• Guaranteed investment certificates (GIC)

• Mutual funds

• Exchange-traded funds (ETFs)

• Equities or stocks

• Income trusts

• Bonds

• Labor-sponsored funds

• Mortgage loans

• Foreign currency

How much should you contribute to an RRSP?

Saving for retirement is essential, especially if you hope to continue living the same way you do now. Even if your home is paid off and other bills are lower as you approach retirement age, unexpected medical costs and family emergencies could require more money than you realize. Planning ahead while you’re working and being able to contribute to this fund is crucial to your financial well-being.

Maximizing your contributions into your RRSP — depositing the total amount allowed by law, plus the excess $2,000 contribution — can help ensure your RRSP is well funded. But not everyone can afford to hit the maximum contribution limit.

Most experts recommend contributing at least 10% of your paycheck — 15%, if possible. So, if you earn $50,000 per year, contributing $31,560 (the maximum contribution limit for 2024), may not be possible. But contributing $5,000 to $7,500 may be more manageable. You can set your contributions to a portion of your salary, so as your income increases, your contributions also rise.

If your employer matches your contributions, you can also strategize to get the most out of this match. Try contributing the amount you’d need to hit to get your employer’s full match (if you can afford it).

Depending on your age, how much you have saved, and your post-retirement financial goals, you may need to follow a different strategy. Talking to a financial advisor or investment professional can help ensure you’re making the most of your RRSP.

When can you withdraw money from your retirement savings plan?

You can technically withdraw your RRSP money at any age, but you may be subject to taxation when you do. There are some exceptions, though. You can typically withdraw a set amount to fund a home down payment, help cover the costs of building a new home, and to fund certain education endeavors.

But you should think carefully before withdrawing from your RRSP. This money is earmarked for a reason and won’t earn as much interest over time if you pull out your funds before retirement. Only withdraw early from your retirement savings plan if you absolutely have to.

What is a registered retirement income fund?

An RRIF, a registered retirement income fund, is a fund you’ll convert your RRSP into after turning seventy-one. It’s like an annuity contract — once you reach retirement age, you’ll receive a set monthly amount from your registered retirement income fund.

You’ll typically receive this amount in addition to your monthly stipend from the Canada Pension Plan.

How to open a registered retirement savings plan

If you work for an employer that offers an RRSP, they should open it on your behalf when you start your job. If you elected not to open a retirement savings plan when you first started, talk to your employer about when you’re eligible to re-enroll and open a plan.

You can open an individual or spousal registered retirement savings plan at any time at a financial institution like a bank or a credit union. It typically only takes a few minutes, and you can usually begin contributing immediately.

Many popular banks in Canada, including Royal Bank of Canada (RBC, Scotiabank, TD Bank, National Bank of Canada, HSBC Canada, and SBI Canada Bank, offer retirement savings plans.

You can also open an individual investment-focused retirement savings plan online or in person at a Canadian brokerage.

Suppose you’re interested in opening a pooled retirement savings plan. In that case, you’ll either do so through your employer (if you’re a small business employee) or at a participating bank, investment firm, or financial institution (if you’re a self-employed worker).

Costs to set up a retirement savings account

There generally is no startup cost to set up a retirement savings account. However, banks and investment firms may charge monthly fees or other fees for certain accounts. Be sure to shop around to find the best retirement savings plan for you.

Retirement savings plan vs. 401(k)

A registered retirement savings plan is the main tax-advantaged account offered in Canada to help you save for retirement. It’s similar to the US savings version called a 401(k), though both plans have key differences.

Here are some similarities:

• Both an RRSP and 401(k) let you contribute pre-tax dollars into a fund that can grow tax-free

• You only pay retirement account taxes on your money when you withdraw your funds

• Both can be set up by an employer

• You may receive an employer match

• You can set up savings, investment plans, or both

• Both have yearly contribution limits
  

Here are some differences:

• An RRSP lets you carry forward unused contribution room. A 401(k) does not.

• An individual can set up an RRSP, but not a 401(k)

• An RRSP offers a $2,000 excessive contribution allowance

• Most 401(k)s have early-withdrawal penalties you pay for pulling funds out before retirement age (in addition to taxation)

Retirement savings plan vs. tax-free saving account

A retirement savings plan and a tax-free savings account are different accounts that work very well together. But each has different use cases.

While a retirement savings plan defers taxation until you withdraw your funds, a tax-free savings account lets you save a certain amount of money and make withdrawals tax-free. An RRSP may offer tax deductions for contributions, but a TFSA does not.

Contributions to an RSP are made with pre-tax dollars, while TFSA contributions are made after tax. Both have contribution limits, and both let you carry over unused contribution room.

A TFSA can help supplement retirement income but is also helpful while you’re employed to earn interest on a down payment for a home, education costs, and more.

Can new Canadians set up a retirement savings plan?

Those new to Canada become eligible to open and to contribute to an RRSP after they’ve filed their first federal income tax return. So if you’re a newcomer Canadian, you can qualify for a retirement savings plan once you’ve met this requirement.

Retirement and your credit score

You might be wondering if your credit score matters for your retirement savings. While growing your credit score can open you up to better financial terms and opportunities, it doesn’t play a huge role in your retirement savings.

That said, having a high credit score can help you lock in more favorable terms on financing a new home and more. This could save you tens of thousands in interest over the long run — money that could be stashed into your retirement fund. So if you want to reap this benefit, working on your credit score can help.

Using a service like KOHO to help build your credit score is one way to boost this three-digit number. KOHO offers free access to your credit score and other financial tools that can help you become more money-savvy. You can open a high interest savings account that earns up to 5% APY, get access to virtual cards, and receive benefits like overdraft protection and no NSF fees.

The bottom line: Crafting the best retirement savings plan

If you want help figuring out how to create a retirement savings plan, reach out to a financial advisor who can help you determine the mix of investment risk vs. savings that should be in your retirement portfolio. A financial counselor can also help you determine how much you should contribute each year to meet your goals.