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What is an RRSP and How Does It Work?
What is an RRSP and How Does It Work?

A Registered Retirement Savings Plan (RRSP) is a powerful tool in Canada that helps you save for retirement while providing tax advantages.

Samuel Jones avatar
Written by Samuel Jones
Updated over a month ago

Key RRSP Facts

  • Tax Advantages

    • Contributions to your RRSP are tax-deductible, reducing your taxable income for the year

    • Investment earnings within the RRSP grow tax-free until withdrawn

  • Contribution Limits

    • Your RRSP contribution room is based on 18% of your earned income from the previous year, up to an annual limit set by the CRA

    • Unused contribution room carries forward to future years

Important Deadlines

  • Annual Contribution Deadline

    • Contributions made by March 1 of the current year can be applied to the previous tax year

    • Example: The deadline to contribute for the 2024 tax year is March 1, 2025

  • Final Contribution Deadline

    • December 31 of the year you turn 71 years old is the last day you can contribute to your own RRSP

    • After this, your RRSP must be converted into a Registered Retirement Income Fund (RRIF) or annuity

Why Contribute to an RRSP?

  • Immediate Tax Savings

    • Contributions lower your taxable income, which can lead to a smaller tax bill or a larger refund

  • Long-Term Growth

    • Investments grow tax-deferred, allowing your money to compound more effectively

  • Retirement Income

    • Withdrawals made in retirement are typically taxed at a lower rate, as retirees often have less income

What Happens When You Turn 71?

  • You can no longer contribute to your RRSP after December 31 of the year you turn 71

  • Your RRSP must be converted into an income-generating option, such as:

    • A Registered Retirement Income Fund (RRIF)

    • An annuity

    • Lump-sum withdrawals, which are subject to tax

Why This Matters

Understanding how RRSPs work helps you maximize their benefits, save on taxes, and plan for a secure retirement.

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