RRSP (Registered Retirement Savings Plan) is an account to grow retirement investments tax free. People who filed income taxes and have a valid SIN number can contribute to an RRSP account.
RRSP accounts can be opened with most financial institutions. These accounts are registered to the government of Canada. CRA (Canada Revenue Agency) may track the amount of deposits and withdrawals on RRSP accounts to confirm that right amount of deductions are claimed when filing taxes.
RRSP Contribution Limit
The RRSP contribution limit is 18% of your previous year’s income, up to $27,830 on 2021. In addition, unused RRSP limits from past years are added to your current RRSP contribution limit. The amount of contribution to pension plans may reduce your RRSP contribution limit.
Employers may contribute to your pension plan. If they do, the amount will be included on the pension adjustment section on a T4 slip which is usually issued before tax filing deadline.
- Unused RRSP Contribution Limits will automatically carryforward to future years.
- Withdrawals from RRSP will not be added to future contribution limit.
- The exact RRSP contribution limit will appear on your Notice of Assessment from the CRA (typically arrives 2-8 weeks after filing taxes). The RRSP contribution limit will also appear on your CRA account.
- Current RRSP Contribution Limit = 18% of previous year’s income (up to a certain amount, $27,830 limit for 2021) + unused contribution limits from previous years
- RRSP Contributions made on a calendar year up to 60 days of the next year are tax deductible.
When filing taxes for tax year 2020, deposits to an RRSP account made on 2020 up to the first 60 days of 2021 can be tax deductible up to the contribution limit amount. Deadline for paying taxes for tax year 2020 may be April 30, 2021.
Example 1
For instance, assume a person filed an income of $100,000 for the tax year 2020. The additional RRSP contribution limit will be $18,000 (18% of $100,000). Thus, up to $18,000 can be transferred to an RRSP account between 2021 to March 1, 2022.
Suppose the same person deposit a total of $15,000 to an RRSP account until March 1, 2022. The $15,000 is tax deductible when filing taxes to declare income for the tax year 2021 (filing deadline of April 2022). Presume an income of $115,000 is earned on 2021. After the RRSP tax deduction, the taxable income will only be $100,000 instead of $115,000.
Assuming a 40% tax rate, the RRSP contribution of $15,000 will result to a tax savings of $6,000.
The unused $3,000 ($18,000 – $15,000) contribution limit will carryforward to future years.
Example 2
For example, a person earned $250,000 on 2021. The 18% of this amount will be $45,000. Since this amount is larger than the maximum of $27,830, the maximum RRSP of $27,830 will apply which means up to $27,830 can be invested to RRSP accounts and used to deduct taxes for future years.
RRSP Tax Deduction
Contributions are the amount of deposits to RRSP accounts. Multiple RRSP accounts can be opened, but the total deposits must be below the contribution limit. Contributions more than $2,000 above the contribution limit are subject to 1% monthly tax by the CRA. Overall, over contribution amounts are not tax deductible.
Deposits (contributions) to RRSP accounts are tax deductible. Assume a person deposit $10,000 to an RRSP and earned $70,000 on a tax year. The $10,000 will be tax deductible. Thus, only $60,000 will be taxable. Supposing a tax rate of 30%, the RRSP contribution will result to a tax savings of $3,000.
If the same individual have an RRSP contribution limit of $15,000 before the year, the unused $5,000 limit can be used to deduct taxes on future tax years.
Is RRSP Taxable
Any income from investments on RRSP are exempt from taxes. Also, deposits to an RRSP are tax deductible and can be used to lower taxes. However, withdrawals from an RRSP are taxable. Withdrawals from RRSP are taxable and needs to be declared as taxable income when filing taxes.
Main Benefit of an RRSP
The fact that RRSP withdrawals are taxable and contributions are tax deductible can make you question the purpose of an RRSP. After all, why use an RRSP when you are going to pay taxes on withdrawals anyway?
For this example, assume a 25% tax rate and $10,000 invested on stocks inside an RRSP compared to the same capital invested on stocks on a regular non-registered account.
Contributions to RRSP are tax deductible. So, the whole $10,000 are invested since there is a tax savings of $2,500. On a regular non-registered account, taxes have to be paid.
Assuming a 25% tax rate, only $7,500 will be invested on a regular non-registered account since you have to pay taxes on employment income.
| RRSP | Regular non-registered | |
| Initial Capital | $10,000 | $10,000 |
| Stock Investments (RRSP are tax deductible, taxes have to be paid for regular income) | $10,000 | $7,500 |
| Let us say the investment double after 7 years | $20,000 | $15,000 |
| Tax rate of 25% applies on RRSP | $15,000 (After-taxes) | $15,000 (Pre-taxes) |
| Half of capital gains are taxable on a non-registered account ($7,500 / 2 * 25% taxes) Total After Taxes (Investments are sold and withdrawn) | $15,000 | $14,062.50 (After taxes) |
When tax rates are the same on contributions and withdrawals, investment profits on RRSP are effectively tax free compared to a non-registered account. The amount of $15,000 after taxes on RRSP withdrawal are similar to the pre-taxes amount outside of RRSP.
For simplicity, the example assumed that the investments doubled (100% returns) after 7 years. Investing in stocks and other assets have risk and it is possible to lose money.
RRSP Investments
RRSP, in itself, is not an investment. The funds inside an RRSP account can be invested to stocks, bonds, GICs, mutual funds, or a regular RRSP Savings account. Profits, dividends, and interest income received on an RRSP account are tax free.
Funds on an RRSP Savings account will automatically earn interest income while deposits to a self-directed RRSP may have to be invested to stocks, mutual funds, or ETFs to earn some returns. However, stocks, ETFs, and mutual funds can drop in value and losing money is possible.
Generally, RRSP Savings accounts and GIC are low risk low returns investments while other investments such as stocks may be riskier and have higher potential upside.
1. Stocks, ETFs, and Mutual Funds
Stocks are ownership of a company. The stock price of a company typically depend on the growth of sales or profits of a company. ETFs are diversified investments which can include stocks and other assets. S&P 500 ETFs such as SPY and VOO tracks the returns of 500 largest stocks in America.
Owning an S&P 500 ETF is similar to owning 500 stocks. On the other hand, mutual funds are managed by asset managers to choose stocks and other assets for you. Mutual funds charge a yearly management fee of around 1% to 2% while most ETFs have a yearly fee of 0.05% to 0.50%.
Questrade RRSP
Questrade offers a self-directed RRSP account where you can buy and sell stocks, ETFs, and mutual funds. Questrade was founded on 1999. Questrade charges around $5-10 for buy or sell stock trades. The main advantage of Questrade is free ETF buys. Selling ETFs on Questrade have a commission fee of about $5-10.
Questwealth, on the other hand, is offered by Questrade to automatically invest funds for a management fee of around 0.37% per year (0.25% charged by Questrade, 0.12% by ETFs). When opening a Questwealth account, a survey needs to be filled to know your risk tolerance and to suit your financial goals to your Questwealth portfolio.
Questrade Video Tutorial: How to Buy and Sell Stocks
Wealthsimple Trade RRSP
Launched on 2019, Wealthsimple stands out as the simplest to use stock and ETF trading platform in Canada. However, they charge an exchange rate fee of 1.50% for every buy or sell US stock and ETF trades. For this reason, people prefer Wealthsimple Trade for Canadian stocks and ETFs since there is no commission for Canadian dollar trades.
Since Wealthsimple is a relatively new platform in Canada, opening an RRSP may be better with the traditional big banks or Questrade. A Personal (taxable) account with Wealthsimple Trade may be best to start trading stocks with small money in Canada.
Video Tutorial: How to Buy and Sell Stocks on Wealthsimple Trade
2. RRSP Savings Account and GIC
RRSP Savings accounts and GICs earns a constant interest income from the money invested. Funds on an RRSP Savings account can be withdrawn anytime.
GIC (Guaranteed Investment Certificate) – Rates on an RRSP Savings account can change anytime. Funds on an RRSP Savings account can be used to purchase a GIC. GICs earn a fixed interest rate income for a period of time which typically varies from 3 months to 10 years.
However, funds on a GIC may only be available to withdraw after the term length of a GIC. The rates are always expressed as a yearly rate for most Financial Institutions’ websites unless otherwise specified.
Interest income from a GIC are usually paid to an RRSP Savings account. At maturity date when a GIC expires, funds on GIC are transferred back to the RRSP Savings account.
Like any RRSP accounts, withdrawals from an RRSP Savings account are taxable. As long as the funds stay on an RRSP, interest income are generally tax free. Taxes will apply on withdrawals since RRSP withdrawals are taxable income.
RRSP Contribution Deadline
The deadline for RRSP contributions is the first 60 days of a year. For tax year 2020, the RRSP contribution deadline is March 1, 2021. Contributions made on 2020 up to March 1, 2021 can be tax deductible when filing taxes for tax year 2020.
How do I find out my RRSP contribution limit?
To find out your RRSP contribution limit, go to your CRA My Account and visit the RRSP section to show your RRSP contribution limit for the year. The amount displayed is the unused RRSP limits of the past years plus the 18% of your last taxable income up to a maximum a certain amount.
Also, the amount of RRSP contribution limit is stated on your Notice of Assessment after filing taxes.
Does the RRSP limit carry over?
Any unused RRSP limit will automatically carry over to future years with no expiration. To maximize tax deductions, it may be best to contribute more when you have a high tax rate (high income).
How much can I contribute to RRSP in 2021?
For 2021, the maximum contribution limit to RRSP accounts is the lesser of $27,830 or 18% of your taxable income on tax year 2020.
How much does RRSP reduce tax?
RRSP reduce taxes on your deposits up to a certain contribution limit. Assuming a person deposit $10,000 to RRSP at a tax rate of 40%, this will reduce taxes by $4,000. Also, profits from investments on RRSP is tax free.
Are contributions to RRSP tax deductible?
Contributions to RRSP are tax deductible up to a certain RRSP contribution limit. The amount of contributions can reduce the taxable income and lower taxes.
RRSP Age Limit
To contribute to RRSP accounts, there is an age limit of 71 years old. When a person turn 71, the RRSP account will be turned to an RRIF account. RRIF accounts require a certain minimum withdrawal amount every year. Also, additional funds cannot be added to an RRIF account.
Thus, contributing to an RRSP account and getting a tax deduction have an age limit of 71 years old.
For more information about RRSP, visit the canada.ca page about RRSPs.