How does an RRSP work?

How does an RRSP work?

Saving for retirement can be accomplished with a Registered Retirement Savings Plan. RRSPs are often crowded before tax filing time because they offer tax advantages. And the earlier you start saving for your retirement, the better. Your retirement savings will benefit from a longer time horizon and compound interest.


Find out how RRSPs work, here you will find answers to your questions

How do RRSPs work?

How can an RRSP help you save for retirement?

What is the maximum amount you can contribute to your RRSP?

In an RRSP, what can you hold?

How do RRSPs differ?

How do self-directed RRSPs work?

How much will your RRSP fees be?



How do RRSPs work?

A Registered Retirement Savings Plan (RRSP) is a kind of savings plan designed to help you save for retirement. An RRSP is a type of savings plan that allows you to save for retirement while also receiving special tax benefits and advantages before you retire. Anyone who files an income tax return and earns income can open and contribute to one.

RRSPs can be opened in many places:

  • Trust companies and banks
  • Caisses Populaire’s and credit unions
  • Companies that manage mutual funds
  • Self-directed RRSP investment firms
  • Companies that provide life insurance

As long as you have earned income and filed a tax return, you can open an RRSP at any age. When you turn 71, you must close your RRSP.



How can an RRSP help you save for retirement?


RRSPs provides many advantages that savings accounts do not, including:

RRSP contributions reduce your taxable income, so you may owe less at tax time or receive a larger refund. By deducting your RRSP contributions from your income each year, you get immediate tax relief. The money you contribute is pre-tax and therefore tax-deductible.

If you keep your RRSP money in the plan, you don’t have to worry about taxes on the interest or investment earnings you make.

As your RRSP contributions are made with pre-tax dollars, you won’t have to pay tax until you withdraw them. That includes both your investment earnings and your contributions.

The marginal tax rate in retirement is likely to be lower than it was during your contributing years for most Canadians with moderate to high incomes. Because of this, you’re more likely to pay less tax when you withdraw the income than you would during your working years.


You can convert your RRSP savings to get regular payments when you retire. You can transfer your RRSP savings tax free into a Registered Retirement Income Fund (RRIF) or an annuity. If you’re in a lower tax bracket in retirement, you’ll pay less tax on the regular payments you receive each year.


You can reduce your combined tax burden with a spousal RRSP. If you earn more than your spouse, you can contribute to their tax-free savings by contributing to a spousal RRSP. Your retirement income will then be split more equally between the two of you. You may be able to reduce your tax bill.


You can borrow from your RRSP to buy your first home or pay for your education. Under the Home Buyers’ Plan (HBP), you can borrow up to $35,000 to pay for a down payment on your first home. Under the Lifelong Learning Plan (LLP), you can also withdraw up to $20,000 for education costs. These withdrawals are tax-free as long as you return the money within the specified period of time.


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What is the maximum amount you can contribute to your RRSP?


You can only contribute a certain amount to your RRSP each year. The lower of the following can be contributed:

  • You must pay 18% of your previous year’s income
  • For each tax year, the maximum contribution amount is set.
  • Your RRSP contribution room can be viewed in your CRA MyAccount, as well as information about your TFSA contribution room and Notice of Assessment.
  • The amount you can contribute to your RRSP will be lowered if you are a pension plan member and do not have the money to contribute in one year.
  • Use our RRSP savings calculator to find out how much your plan will be worth at retirement and how much income it will provide.
  • You can save for retirement with both RRSPs and Tax-Free Savings Accounts (TFSAs).
  • A TFSA may be more beneficial if you are in a lower income bracket.
  • TFSAs and RRSPs differ in several ways.


In an RRSP, what can you hold?


Savings deposits and investments can be held in RRSPs just like in other registered savings plans. There are many qualified investments that can be held in an RRSP, including cash, gold, GICs, bonds, mutual funds, and year. The metals, commodity futures contracts, real estate, and other prohibited investments cannot be held in an RRSP.



If you have both registered and non-registered accounts for investing, use your RRSP to hold investments, such as GICs and bonds, which are taxed at a higher rate. In your non-registered account, you can hold investments that are taxed at a lower rate – like those that generate dividends.

How do RRSPs differ?

Although individual RRSPs are the most common, you may also be interested in spousal or group RRSPs.

RRSPs for individuals

An individual RRSP is an account that is registered in your name. It is your responsibility to manage and build your RRSP investment portfolio yourself with a self-directed RRSP or work with an advisor. The investments in the RRSP, as well as the tax advantages associated with them, belong to you.

RRSPs for spouses

A spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the RRSP, but you contribute to it. The contributions you make to a spousal RRSP reduce your RRSP deduction limit for the year. They won’t affect how much your spouse can contribute to their own RRSP.

In retirement, you and your spouse can split your income more equally with the help of a spousal RRSP. Therefore, you may have a lower combined income tax rate than if all of your savings were in a single RRSP. If you earn more than your spouse and you will be in a higher tax bracket when you both retire, or if you have a pension plan while your spouse does not, this may be a good move.


In order to qualify for a spousal RRSP, you must:

Having lived together for at least 12 months as a couple ,Birth or adoption of a child together Ensure the well-being of your partner’s children from a previous relationship by sharing custody and support. When your spouse withdraws money, you have contributed:

If you withdraw money within three years of the contribution date, you’ll have to pay taxes

A spouse will pay tax on the withdrawal amount three years after the contribution date. In the event that your relationship ends:

In general, spouses must divide assets equally if they are married Consider drafting a joint agreement if you are living common-law as assets might not necessarily have to be divided equally.

It doesn’t make sense to open a spousal RRSP if your spouse’s income will be roughly equal to yours when you retire.

RRSPs for groups

Employers sometimes offer group RRSPs to help employees save for retirement. You open an individual RRSP, but you contribute to it through your employer. The RRSPs of all the employees are maintained at the same financial institution. Here’s how it works:


Contributions to your plan are usually deducted automatically from your paycheck. Your employer may also match or add to your contributions.

In most cases, your employer pays for the opening and management of your plan. You are responsible for any investment costs. Group RRSPs usually have limited investment options, depending on where they are held. Employers have different rules about when and how much money you can withdraw from the plan.

Discover how your group RRSP works. The options and rules vary depending on your employer and where the plan is held.

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How do self-directed RRSPs work?

An individual or spouse’s self-directed RRSP allows you to take a more active role in choosing and managing investments.

RRSPs with self-directed options are available at both full-service and discount brokerage firms. This makes it easier for you to keep track of your investments and maintain the asset mix you want.

You may benefit from a self-directed RRSP if you meet the following criteria:

  • A broad range of investment options is important to them.
  • You are an experienced investor.
  • Manage your investments when you have time.

Set-up fees, annual trustee fees, and sales charges for buying and selling investments may be charged for opening and managing your self-directed RRSP, just as they are for any other account. You may also pay a fee for investment advice or for managing your investments. Discount brokerages tend to charge lower commissions, but you’ll need to be comfortable making your own investment decisions.




If you need advice on investing and managing your RRSPs, open an account with a full-service brokerage. If you don’t need advice, open a discount brokerage account and lower your fees.


How much will your RRSP fees be?

RRSP fees vary depending on where you open your account and how you invest your savings. There are four main types of fees you might encounter:

A small set-up fee may be charged by some institutions to open an RRSP account.

The annual administration or trustee fee varies from RRSP to RRSP. If you have a group RRSP, your company may cover this fee. Make sure you know what these fees are before opening an account.

You pay a commission when you buy and sell stocks, ETFs, or mutual funds for your plan. You may also pay a management expense ratio (MER) if you hold mutual funds or ETFs for your plan.

Other costs – Some plans charge fees for certain services, such as transferring money to another RRSP or closing the account.

It may be possible for your financial institution to waive the annual fee if you have other accounts there or if you have enough savings.



Find out what the fees are for opening, administering, transferring money, and closing an RRSP. Don’t be surprised if you need to make a change later on.


In summary

Registered Retirement Savings Plans (RRSPs) are savings plans that help you save for retirement. An RRSP can be opened by anyone with earned income who files a tax return. There are three types of RRSPs: individual, spouse, and group. If you don’t use all your RRSP contribution room each year, it carries over to the next. Savings and investments can be held in an RRSP, which grows tax-free. RRSPs and TFSAs are examples of savings plans. RRSPs can be converted to RRIFs or annuities when you retire you can visit our website and schedule an appointment with one of our team to discuss with you more details