Complete guide to your RRSP. Learn all about the contributions, withdrawals RRSP benefits. It is never too early to start investing in your RRSP. Think about contributing now to get the maximum RRSP benefit. #RRSP #RRSPCanada #Canada #savingsplan #handfulofthoughts

A Complete Guide to Your RRSP

There is more than one RRSP benefit available to you. In order to fully understand these, you should have a good understanding of RRSP’s in general.

A RRSP is a registered retirement savings plan.  It is a tax deferred account. This means, you contribute pre-tax money, it grows tax free and then it is taxed when you withdraw it. The RRSP benefit of the tax deferral happens if you have a lower marginal tax rate when you withdraw than when you contribute.

A RRSP is an umbrella term.  It is a type of account that can hold a number of different investments. Stocks, bonds, index funds, ETF’s, mutual funds, private equity funds, REIT’s and real estate are just some of the investments you can have in your RRSP.

The type of investment you choose to put in your RRSP will depend on both the length of time you have to invest and your risk tolerance.  Boomer & Echo suggests a balanced approach of 60% stocks and 40% bonds.

RRSP Basics – Contributions

The annual RRSP limit is 18% of the income on your prior year’s tax return, up to a maximum amount.  The maximum amount fluctuates.  For 2020 the RRSP maximum contribution limit is $27,230. 

Your individual contribution limit may vary if you have a pension with your employer.  The amount contributed to your pension will affect your RRSP contribution limit. To find out what your specific contribution room is, look at your previous year’s tax return or login to My Account on the CRA website.

Action Step – Find out what your RRSP contribution room is for this year.  Check last year’s tax return or login to My Account on the CRA website.

You are not required to contribute your maximum RRSP limit every year. The remaining amount can be carried forward to future years. 

Let’s look at an example:

According to Sarah’s 2019 tax return, her income was $50,000.  That means that her maximum contribution limit for 2020 is $9000 assuming she is not carrying forward any contribution room from previous years.  Sarah has decided to contribute $5000 to her RRSP in 2020.

In 2021, Sarah’s income tax return for 2020 also had her income of $50,000.  This would mean her RRSP contribution limit would be again $9000. But, because she did not max out her contributions in the previous year they are carried forward. For 2021, Sarah’s’ contribution limit is now $13,000; $9000 from this year and $4000 carried forward from last year.

RRSP Contribution Deadline

The annual contribution deadline is usually March 1stof the following year for the previous year’s tax return, except in a leap year.  So the RRSP deadline for contributions to count towards your 2020 tax return is March 1, 2021.

Be careful not to over contribute to your RRSP. There is a 1% per month penalty on any over contributions made to your RRSP.

Complete guide to your RRSP.  Learn all about the contributions, withdrawals RRSP benefits.  It is never too early to start investing in your RRSP.  Think about contributing  now to get the maximum RRSP benefit. #RRSP #RRSPCanada #Canada #savingsplan #handfulofthoughts

RRSP Basics – Withdrawals

There are 2 types of RRSP funds, those that are locked in and those that are not.  Locked in RRSP’s are exactly that, locked in until retirement age.  They cannot be withdrawn from early.

Non-locked in RRSP’s can be withdrawn from at any time.

All RRSP’s must be either withdrawn or converted to a RRIF (registered retirement income fund) at the age you turn 71.  You are not allowed to own a RRSP past December 31stof the year you turn 71.

If you have a large RRSP and room in your TFSA it may be a good idea to look into potentially drawing down from your RRSP and putting it into your TFSA before you turn 71.

If you convert your RRSP to a RRIF prior to the age of 71, the annual withdrawals are determined by a formula.  

RRIF withdrawal formula
RRIF Withdrawal Formula

At the age of 71 annual withdraws are predetermined by the government.  A RRIF therefore has less flexibility than a RRSP. 

Withholding Tax

Whenever there is a withdrawal of any kind from your RRSP there is a withholding tax.  The withholding tax is held back at the source (wherever your RRSP is held) and submitted directly to the Canada Revenue Agency on your behalf.  It is to help offset the taxes that will accrue on the withdrawn amount.

The RRSP withholding tax is similar to the income tax that your employer withholds from your pay cheque every month.

Withholding TaxRRSP Withdrawal Amount
10% (5% in Quebec)up to $5000
20% (10% in Quebec)from $5000 – $15,000
30% (15% in Quebec)more than $15,000

The withholding tax is different in Quebec because they also have a provincial withholding tax.

RRSP Benefit – Spousal RRSP

A spousal RRSP is a way in which your registered retirement savings plan can be used to splint income with your spouse in retirement. It helps to even out contributions if both spouses are not equal income earners and RRSP contributors.

It is important to note that when contributing to a spousal RRSP the contributions cannot be withdraw for 3 years.  This is called the 3 Year Attribution Rule.

With a spousal RRSP one spouse (usually the higher income earner) contributes to the other spouse’s RRSP.

Let’s look at an example:

Carlos and Helena are married. Helena is a stay at home mom and Carlos works full time at a refinery.  He has $50,000 saved in his RRSP to date while Helena only has $10,000.  This year Carlos and Helena have decided to take advantage of the spousal RRSP benefit.

Carlos has $9000 in RRSP contribution room for this year and has saved up that amount to invest.  Instead of contributing it directly to his RRSP Carlos contributes it to a spousal RRSP for Helena.  He gets the tax credit for the contribution but it is contributed to Helena’s RRSP.

Carlos still has $50,000 invested in his RRSP and now Helena has $19,000 in hers.

Benefits of a Spousal RRSP
  • Evens out RRSP contributions between spouses therefore evening out the tax implications on retirement
  • High income earner receives larger tax credit while contributing to lower income earner’s RRSP
Who Spousal RRSP is for:
  • Unequal income earners who have RRSP contribution room
Who Spousal RRSP is NOT for:
  • Equal income earners
  • Spouses without RRSP contribution room

For years my husband was a high income earner and I was a low income earner.  As a future planning tax strategy he contributed to my RRSP through a spousal RRSP. 

We found the spousal RRSP to be a great way to reduce my husband’s marginal tax rate while evening out the amount we both have in our RRSP’s.

RRSP Benefit – Home Buyers’ Plan (HBP)

The Home Buyers’ Plan or HBP is a way to withdraw from your RRSP without having to pay the withholding tax.  It is essentially an interest free loan to yourself from your retirement plan.  

The withdrawal must be used to buy or build a qualifying home for yourself or someone related to you with a disability.  The relation can be by blood, marriage or common-law. The person with the disability for whom the home is built does not have to reside with you.

As of 2019, you can now withdraw $35,000 from your RRSP for the Home Buyers’ Plan.  (The previous amount was $25,000).  There is however a limit on certain contributions made in the period 89 days prior to the withdrawal.  You best bet is to have that money in your RRSP for more than 90 days before withdrawing for the Home Buyers’ Plan.

Repayment of the Home Buyers’ Plan must begin in the second year after the withdrawal. Once you initiate the HBP, you have up to 15 years to pay the money back into your RRSP.  

To calculate the annual repayments to your RRSP, take the total amount used for the Home Buyers’ Plan and divide it by 15.  Extra repayments of your HBP will affect future required repayments.  If extra repayments are made, to calculate future required payments, take the amount owing and divide it by the years remaining to pay.

Let’s look at an example:

Ali has been saving into his RRSP for years and has accumulated $50,000.  He is now ready to buy his first home and is planning on taking advantage of the Home Buyers’ Plan RRSP benefit. Ali withdraws $35,000 in 2019 to put towards the down payment on his new home.

In 2021 Ali will be required to start making Home Buyers’ Plan repayments into his RRSP. To figure out how much his repayments will be in 2021 he takes $35,000 and divides it by 15. In 2021 Ali will have to repay $2334.

Below is a chart that shows Ali’s repayment schedule including a year when he decides to pay more than the required amount. Notice what happens to his future payments.

(years remaining)
Required Repayment RepaymentRepayment Remaining
2021 (14)$2334 ($35,000 / 15)$2334$32,666
2022 (13)$2334 ($32,666 / 14)$2500$30,166
2023 (12)$2320 ($30,166 / 13)$2500$27,666

Repaying your Home Buyers’ Plan is as easy as contributing to your RRSP and designating it as a HBP repayment. RRSP contributions are not automatically applied to your HBP.  For this reason, if you want the contribution to count towards your Home Buyers’ Plan repayment, make sure to designate it as such.

Home Buyers’ Plan – Something to Think About

Although the RRSP Home Buyers’ Plan can help you buy a home and get into the housing market, taking advantage of this RRSP benefit may not be in your best interest long term. As you are borrowing from your retirement account, you are eliminating that money’s ability to grow in a tax deferred manner.

A major RRSP benefit is its ability to grow tax deferred. Using the power of compound interest your RRSP can grow exponentially. And all this happens without you having to pay tax on that money until you begin to withdraw it.

When you take advantage of the HBP RRSP benefit, that money is no longer growing in your RRSP account. It is no longer compounding year over year.

In my opinion, for this reason, it may be smarter for you to wait and save up for that down payment on your home. That way your money can stay in your RRSP and work harder for you (instead of you working harder for your money).

Remember, if you do take advantage of the Home Buyers’ Plan, you are required to start paying it back in the second year after you make the withdrawal.  At that point you will have mortgage payments (and all the other costs that come with buying a home) AND Home Buyer’s Plan repayments.  All those payments add up and will affect your budget’s bottom line.

RRSP Benefit – Lifelong Learning Plan (LLP)

The Lifelong Learning Plan (LLP) is another way to withdraw from your RRSP without having to pay the withholding tax.  Like the Home Buyers’ Plan, the Lifelong Learning Plan RRSP benefit is an interest free loan from your RRSP.

In order to take advantage of the Lifelong Learning Plan, the withdrawal must be for full time training or education at a qualifying institute or program for you or your spouse or common-law partner.  You cannot use the Lifelong Learning Plan for your children.

Lifelong Learning Plan Conditions:
  • Enrolled in full time training or education
  • Enrolment at qualifying institution or program
  • Resident of Canada
  • Own a RRSP
  • If using LLP in previous year, repayment period is not to have begun

You can use the Lifelong Learning Plan at the same time as your spouse and at the same time as the Home Buyer’s Plan.  But the money must be in your RRSP for at least 90 days prior to withdrawing it for the LLP.

The Lifelong Learning Plan enables you to withdraw up to $20,000 for qualifying education or training, but only $10,000 can be withdrawn in one calendar year.  As long as the LLP conditions are met, you can use that withdrawn money for whatever you see fit.

You have up to 10 years to repay your Lifelong Learning Plan. The repayments are not required until the start of your 5thyear after your first withdrawal, as long as the above mentioned conditions are met for at least 3 months every calendar year.  If the conditions are not met for 2 consecutive years then repayments will begin immediately.

Once the Lifelong Learning Plan repayments are complete, the LLP RRSP benefit can be taken advantage of again as long as all the conditions are met.

Similar to the Home Buyers’ Plan, repayments to your Lifelong Learning Plan must be RRSP contributions designated as such.  To figure out what your LLP repayments would be, take the total amount owing and divide it by the years remaining to pay.

Let’s look at an example

Fatima has decided to go back to school and to take advantage of the Lifelong Learning Plan RRSP benefit to help fund her new training.  She has enrolled in a qualifying institution full time and has ensured that all the conditions of the Lifelong Learning Plan are met.  

Fatima withdraws $8000 from her RRSP through the Lifelong Learning Plan.  Her program finishes after 1 year so she is therefore required to begin making repayments at that time.  Fatima’s payments will be $800 per year for the next 10 years.  

She can however accelerate the repayments and pay the money back into her RRSP in less than 10 years.

Lifelong Learning Plan – Something to Think About

Employing the RRSP Lifelong Learning Plan it can be very advantageous.  In order to make the most of this plan, seek education that will have a direct positive impact on your annual salary.  

Another important factor is the repayment schedule.  If you choose to use the Lifelong Learning Plan RRSP benefit, make the full repayments as quickly as possible. This will ensure your money has more time to grow tax deferred in your RRSP.

Because the limit to the Lifelong Learning Plan is lower than the Home Buyers’ Plan, and the repayments must be made in 10 years as opposed to 15 with the Home Buyer’s Plan, the LLP RRSP benefit is in my opinion, the better choice.

From my point of view, enrolling in extra education in order to increase your earning potential makes this a better decision than using the Home Buyer’s Plan to invest in an asset that may or may not appreciate over time.

Like any financial decision, careful thought and planning are required before taking advantage of either the RRSP Home Buyers’ Plan or the Lifelong Learning Plan.

RRSP Benefit – Tax Deduction

One of the major RRSP benefits is the tax deferral and immediate tax deduction.  This benefit depends on your marginal tax rate.  The higher your marginal tax rate, the greater your deduction and potential tax refund.  That being said, any RRSP contribution will result in a tax deduction.

The benefit of the tax deferral will depend on your marginal tax rate upon withdrawal.

Let’s look at an example

Annual taxable IncomeMarginal Tax RateTax Owing
$50,000 (no RRSP contribution)$47,630 @ 15%$2,370 @ 20.5%$7144.50$485.85TOTAL – $7630.35
$50,000($5000 RRSP contribution)$45,000 taxable$45,000 @ 15%$6750($880.35 refund)
$50,000($9000 max RRSP contribution)$41,000 @ 15%$6150($1480.35 refund)

The above table is based on 2019 federal marginal tax rates and does not take into account provincial taxes.

RRSP Benefit – Tax Refund

The best (read only) thing you should do with any tax refund you get is to reinvest that money or use it to pay off debt. Essentially your refund (from contributing to your RRSP), is getting the money now that you will eventually have to pay back when you make a RRSP withdrawal.  Put that money to work for you.

Squandering your tax refund on consumerism is an absolute waste.  

Some people say that tax refunds are bad, that they are a sign of poor planning.  This is somewhat true.  A tax refund is essentially you getting your money back from the government that you loaned them interest free.  

One way to get around loaning the government your money tax free is to make regular RRSP payments and then notifying your HR department of such.  They can adjust your payroll so that less tax is being deducted at the source.  This takes some planning and can become complicated. You may end up owing tax at the end of the year if an error is made.

If you are someone who likes to be completely optimized, then definitely look into making sure the correct amount of tax is being deducted so that you do not loan the government your money interest free.  

For me, my time and energy is better spent on other things so I will continue to contribute to my RRSP, loan the government my money interest free and take my tax refund at tax time.

When that refund cheque comes in, you can be sure that I will be reinvesting that money. 

Free Money

Does your workplace have a RRSP contribution match? If so, take advantage of it.  It’s free money and one of the best RRSP benefits (although not inherent to the RRSP program).

Here’s how RRSP contribution matches work.  

You contribute to your RRSP and your employer will match up to a certain percentage.  For example, if your employer matches 5% then for every $100 you contribute, your employer will contribute $5 to your RRSP (usually up to a certain limit).

The employer match is free money and automatically increases your return on investment. In the above example you are guaranteed a 5% return on your money regardless of how it’s invested.

Even if you cannot full max out your RRPS contributions every year, it’s a good idea to at least contribute to the maximum amount that your employer matches.  That way you are taking full advantage of this employer benefit.

Action Step – If you are unsure if your employer has an RRSP contribution match, make an appointment with your HR department.

Personal RRSP Benefit Strategy

We plan to withdraw from our RRSP’s prior to retirement age.  

Currently our household is pursuing financial independence, and our RRSP’s are one tool we are using to do this.

We are contributing as much as we can afford to. But have yet to max out our RRSP’s due to years of working and not contributing.  As my husband has a higher marginal tax rate than me, we are using his contribution room to get the most tax credit out of our contributions.  At times, we have taken advantage of the spousal RRSP benefit to even out our RRSP’s.

Meanwhile, I’m still working and therefore increasing my contribution room. My annual wage continues to increase due to experience increments. This is increasing my marginal tax rate and contribution room.

There were a few years when we were diving into investing into real estate that we stopped contributing into our RRSP’s all together. 

Then we got hit with a massive tax bill. After that we found a balance between investing in our RRSP’s and buying rental properties.  This balance has had a major positive impact on our net worth.

Not a traditional retirement

Because of our real estate investment portfolio, we expect to be in a high marginal tax bracket by the time we get to traditional retirement age.  If we were to wait until then to withdraw our RRSP’s then they would be taxed at that high marginal tax rate.

One tactic we plan on employing is having my husband leave his job in the next few years (specific date dependent on a few factors).  When he quits his job he can become a stay at home dad with our little ones.  Because he will have no income from an employer at this point he will be in a low marginal tax rate.  This is when we plan on starting to withdraw from his RRSP. 

When he contributed to his RRSP he had a high marginal tax rate but when we withdraw it he will be in a much lower marginal tax rate.  The difference between contribution and withdrawal marginal tax rates is an added bonus of our RRSP strategy.  As I will still be working, we will not “need” the money he is withdrawing. We can use it to top up our TFSA’s or put towards paying off our real estate investments. Or better yet, re-contribute it to my RRSP for the tax credit.

This RRSP technique is not for everyone.  We have done our research and are working closely with our financial advisor on optimizing our RRSP’s. Before liquidating your RRSP prior to traditional retirement age, seek advice from a trusted financial expert.

RRSP’s Final Thoughts

If you’re young, traditional retirement age seems like a lifetime away.  This is the perfect time to contribute to a RRSP.  The more time your money is in a RRSP, the more time it has to grow and compound.  Time really is on your side.

Take some time now, before the rush of tax/RRSP time and check out how much RRSP contribution room you have.  Make a plan now to start saving so that you have to invest prior to the RRSP contribution deadline.  Going forward you may even want to automate this process.  

When coming up to big life milestones like buying a house or seeking further training and education remember that your RRSP may help give you a leg up.  The Home Buyers’ Plan and Lifelong Learning Plan are RRSP benefits of the program. But before you decided to make a RRSP withdraw make sure you carefully consider all options.

If you’re not getting the most out of your RRSP benefits, what’s stopping you?

10 thoughts on “A Complete Guide to Your RRSP”

  1. Very comprehensive! I would only add that for people in lower income brackets now (such as students or recent grads) they might consider TFSAs now. We’ve also used the spousal RRSP to even our our retirement savings.

    1. Thanks Kari. Yes a TFSA is a great alternative for lower income earners. Investing in a TFSA and allowing your RRSP contribution room to grow until you have a higher income is a way you can take advantage of the RRSP tax return benefit.

  2. I am currently paying back a HBP that I borrowed about 10 years ago. I know there is no tax advantage to paying it off early but I think the years it is invested are worth it. What do you think? If you took out a HBP would you pay it back faster than required if you had the cash?

    1. Hi Pam, the longer that money is in your RRSP the more it has time to grow. That being said, the speed in which I would repay my Home Buyers’ Plan would depend on my personal situation was at the time. If I had high interest debt paying off that first should be the priority. If the only debt I had was my mortgage and my HBP then I would look at accelerating the HBP repayments. Another strategy to employ could also be to make the minimum repayment and then also contribute directly to my RRSP. Then take the tax return from the RRSP contribution and put that extra money onto the HBP repayment.

      There are a lot of options for repaying your HBP, but just remember that the longer money is in your RRSP, the longer it has to compound and grow. Please keep us updated on if you decided to pay it back early or not.

  3. So random update – I met with my accountant today and I discovered I have over contributed by about $400 (due to a sneaky 3rd payday in January which I forgot to account for). I’ll be using the remaining part of my HBP to get me back down to the contribution limit. I’ll probably do this for the next couple of years rather than just paying the whole thing off. Especially given the dumpster fire the market is right now. While I am not pulling anything out and my regular contributions will go in, I think I’ll leave any extra cash in a Wealthsimple or comparable high interest savings account for the minute.

    1. Pam – good thing you had the “extra” room in your HBP repayment. Not paying it off early gave you options with your over-contribution.

      As for the markets, markets go up and markets go down – that’s just what they do. I think you have a good strategy in just staying consistent with your play. Things can go very wrong when people invest with emotion.

      Sadly, with the previous interest rate cuts, high-interest savings accounts are not as lucrative as they were a month ago. Still a good place to park an emergency fund.

  4. Lots of great information about RRSPs! I only recently started contributing to mine as I was a low-income earner while in nursing school but now that I’ve graduated I contribute monthly. Thanks for the article 🙂

    1. Celene – happy to hear this article helped. One of the great things about the RRSP is that your contribution room accumulates. So not contributing during lower income years can help you later in higher income years.

  5. Wow, yet another detailed, helpful post from you, Maria! This is an excellent reference-type post that I can easily share.

    The HBP option is such a tricky decision, especially for young people trying to buy in expensive areas (like Vancouver)—where you need every penny to make the huge downpayment!

    I’ve had younger relatives ask for my opinion on the topic, but I’ve always found it hard to advise them one way or another. Your post makes it a lot easier to see the decision clearly.

    There are lots of costs you’re just kicking down the road by using the HBP. So yeah, it’s not really worth using.

    1. Thanks, Chrissy, your support is always appreciated.

      You’re correct the HBP can be tricky. Although it may seem like a great option but that isn’t a statement that applies to everyone. Definitely worth looking into before making such a big decision.

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