A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada where Pre-tax money is placed and grows tax-free until withdrawal, at which time it is taxed at the marginal rate.
One of the most important rules concerns the amount of money you can contribute to the account in any given year; it’s either 18% of your past year’s income or a maximum amount, whichever’s smaller. Unused contributions from previous years can be used.
Yearly Maximum RRSP Deduction Limit:
2025.................... $32,490
2024.................... $31,560
2023.................... $30,780
2022................... $29,210
2021.................... $27,830
2020.................... $27,230
RRSP doesn't guarantee that you may retire comfortably; however, it is a guarantee that the investments will grow without being taxed, as long as the funds are not withdrawn.
RRSP is tax-deferred, which means contributors delay the payment of taxes until retirement, when their marginal tax rate may be lower.
The Government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which will help the population rely less on the Canadian Pension Plan to fund retirement.
RRSP must be converted to a RRIF or annuity, or paid out in a lump sum by the end of the calendar year in which you turn 71.
RRSP Withdrawals are subject to Withholding Tax:
10% up to $5,000
20% between $5,000 to $15,000
30% for over $15,000
You lose the contribution room permanently
Is there a deadline for RRSP contribution?
March 1st (Or February 29, during a leap year) is the deadline to contribute to their RRSP for the tax year. This is the last day that people can contribute to their RRSP if they want to take advantage of deductions and increase their tax refund in spring. (The deadline is calculated based on 60 days from December 31st)
What If someone cannot contribute before the deadline?
Any remaining contribution room rolls over and is added to their limit for the following year. It is only needed to meet the deadline if someone wants to apply those contributions towards their taxes this year.
What happens if you go over your RRSP deduction limit?
Generally, you have to pay a tax of 1% per month on excess contributions that exceed your RRSP/PRPP deduction limit by more than $2,000 unless you withdraw the excess amounts OR contribute to a qualifying group plan.
If you have to pay this 1% tax, fill out a T1-OVP, 2022 Individual Tax Return for RRSP, PRPP and SPP Excess Contributions return and send it to your tax centre. Pay the tax within 90 days after the calendar year to avoid late-filing penalties or interest charges.
Some Major RRSP Benefits:
- Lower your Taxes: Contributing money into RRSP lowers your Gross income, hence reduces your Taxes.
- Home Buyers Plan: CRA allows eligible first-time homebuyers to withdraw up to $60,000 tax-free from their RRSP to be used towards a down payment on the purchase of the home. For couples, this means a combined potential withdrawal of up to $120,000
To be eligible, funds must be kept inside RRSP for 90 days. Must Re-pay the money in 15 years (beginning the 2nd year following the withdrawal) with 0% interest.
Disability Exception: The plan is also available to those buying a home for a related person with a disability or making the home more accessible for themselves if they have a disability.
- Lifelong Learning Plan: CRA allows eligible students to withdraw up to $20,000 tax-free from their RRSP to be used for education purpose. Only up to $10,000 can be withdrawn in a Calendar year. Must Pay Back the money in 10 years with 0% interest.
- Spousal RRSP: Open to both married and common-law couples. A spousal RRSP is a retirement vehicle that allows a higher-earning spouse to make contributions to an RRSP account in their partner’s name and benefit from the tax deduction. If money is withdrawn within three years of a contribution, the funds will be taxed as your income — not your spouse’s (this is called the three-year attribution rule)
As of January 2025, the following changes to Canada's Home Buyers' Plan (HBP) are in effect:
1. Increased RRSP Withdrawal Limits
Effective Date: April 16, 2024
Details: The maximum amount individuals can withdraw from their Registered Retirement Savings Plans (RRSPs) under the HBP has increased from $35,000 to $60,000. For couples, this means a combined potential withdrawal of up to $120,000.
2. Extended Repayment Grace Period
Effective Date: Withdrawals made between January 1, 2022, and December 31, 2025
Details: The repayment grace period for funds withdrawn under the HBP has been extended from two years to five years. This means that individuals who made their first withdrawal within the specified dates have up to five years before they are required to begin repayments.
These measures aim to make homeownership more accessible for first-time buyers by providing increased access to funds and greater flexibility in repayment schedules. Additionally, starting August 1, 2024, first-time home buyers purchasing newly built homes have the option of 30-year mortgage amortizations, allowing for lower monthly payments.
Contact us to Learn more about how you can contribute to your RRSP and maximize your Tax benefits.
