This article is sponsored by Fidelity Investments Canada ULC. All opinions are mine.
The Registered Retirement Savings Plan (RRSP) is an excellent tool to save for your retirement.
Canadians can generally rely on the “three pillars of retirement” for generating income to support their lifestyles during their senior years.
The first pillar refers to government benefits like the Old Age Security (OAS) and Guaranteed Income Supplement (GIS). The second pillar refers to the Canada Pension Plan (CPP) and Quebec Pension Plan (QPP).
Workplace pensions that may be set up as group RRSPs or registered pension plans, personal RRSPs, tax-free savings accounts (TFSAs), and non-registered investment accounts comprise the third pillar.
What is an RRSP?
An RRSP is a tax-advantaged savings account registered with the government that enables you to save for retirement.
The primary benefit of an RRSP is that it allows for tax-deductible contributions and tax-deferred investment growth. Combining these two features means you can grow your retirement nest egg faster during your working years and defer taxation to a time in the future when you will likely be in a lower tax bracket.
The government announces a contribution limit that is 18% of your earned income from the previous year, up to a maximum limit that is updated annually. For 2023, the maximum RRSP contribution limit is $30,780.
The Benefits of an RRSP
The RRSP is a useful element of retirement planning, and its main benefits are explained below.
1. RRSP Contributions are Tax-Deductible
When you contribute money to your RRSP, you can deduct that amount from your total income when filing your taxes for the year. This lowers your taxable income, resulting in immediate tax savings.
For example, if your gross income for the year is $100,000 and you contribute $15,000 to your RRSP, your taxable income for the year becomes $85,000. If you are in a 35% tax bracket, this could save you $5,250 in taxes (i.e. $15,000 x 0.35).
You are not required to deduct your RRSP contributions each year. You can decide to carry forward your contributions and deduct them later. For example, in a future year when you are in a higher tax bracket.
2. RRSP Earnings Grow Tax-Deferred
Your RRSP funds are allowed to grow tax-free until you make withdrawals. This tax advantage means your investments can compound faster since you won’t be paying taxes on income, capital gains, or dividends earned during your accumulation phase.
When you eventually withdraw funds from your RRSP, they are treated as regular income for tax purposes.
3. RRSPs Offer Tax-Free Withdrawals
There are two scenarios where you can borrow funds from your RRSP without immediate tax penalties.
The Home Buyer’s Plan (HBP) allows first-time homebuyers to withdraw up to $35,000 to purchase or build a home. If you are buying a home with a partner who qualifies, they can also withdraw up to $35,000. You must repay HBP withdrawals within 15 years.
The Lifelong Learning Plan (LLP) allows you to use RRSP funds to go back to school. You can withdraw up to $20,000 in total (or $40,000 for a couple) and repay the amount over 10 years.
4. You Can Carry-Forward Unused Contributions
If you don’t use up all your RRSP contribution room for the year, you can “carry forward” the unused portion and add it to your contribution room for future years.
This unused contribution room accumulates indefinitely, until the end of the year you turn 71.
After age 71, you can no longer contribute to your own RRSP. You must close it by converting it to an RRIF, purchasing an annuity, or withdrawing as cash (you can also do a combination of these).
5. RRSPs Offer Creditor Protection
One way to protect your retirement funds from creditors is to invest them in an RRSP.
If you declare bankruptcy, your RRSP is generally protected under the Federal Bankruptcy and Insolvency Act, with some exceptions.
Many provinces also offer varying levels of creditor protection for RRSPs and Registered Retirement Income Funds (RRIFs).
6. RRSPs Support Spousal Contributions
A couple can split their retirement income and lower the overall family tax burden using spousal RRSPs.
One partner (generally the higher earner, i.e. the contributor) makes contributions to an RRSP in the other partner’s name (typically the lower earner, i.e. the annuitant).
The contributor uses their own contribution room, and they get the tax deduction. The annuitant owns the assets in the spousal RRSP, and they pay taxes when they withdraw the funds (subject to some attribution rules).
Spousal RRSPs work best when one partner is in a higher tax bracket, and it can help maximize the tax efficiency of RRSP contributions for the household.
7. You Can Invest in a Variety of Assets
RRSPs support a wide range of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more.
Canadian investment fund managers like Fidelity help to simplify investing in an RRSP by offering diversified portfolios that are tailored to match various investor risk profiles.
Here are some resources for securities you can hold in your RRSP:
- Fidelity Mutual Funds
- Fidelity Sustainable Investments
- Fidelity ETFs
- Fidelity ClearPath® Retirement Portfolios
- Fidelity Private Investment Program
Fidelity is running an RRSP contest from October 19, 2023, at 2:00 p.m. ET to November 30, 2023, at 5:00 p.m. ET.
If you are looking to accelerate your retirement savings, you can enter the contest for a chance to win $10,000!†
The winner of the contest will be contacted in December 2023.
Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the mutual fund or ETF’s prospectus, which contains detailed investment information, before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.
The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.
†No purchase necessary. Fidelity Investments Canada RRSP Contest is open to residents of Canada who are the age of majority. Financial advisors and employees of Fidelity, among others, are excluded from the Contest. Void where prohibited. Contest starts October 19, 2023, at 2:00 p.m. ET, and ends November 30, 2023, at 5:00 p.m. ET. One prize available to be won, consisting of an $10,000 CAD cheque to be used or invested at the winner’s discretion. Skill-testing question required. Odds depend on number of entrants. For full rules and entry details, please see the Official Contest Rules and Regulations.
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