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Contributing to a Registered Retirement Savings Plan (RRSP) in 2025 may be more important than ever. Here are 5 reasons to consider.
1. Save for retirement with RRSP contributions
Whether your RRSP contribution will be large or small this year, it may be more important than ever to ascertain what retirement savings you will need and how you will fund a comfortable retirement.
Many Canadians may not have saved enough money to fund their retirement. This year, a part of staying safe may include staying financially safe. Evaluating your plan to save for retirement and determining how much you can contribute to your retirement savings can help you in the future. You can make an RRSP contribution for the 2024 taxation year by the RRSP contribution deadline, March 1, 2025.
The 2024 Canadian Retirement Survey1, from the Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data, indicates Canadians are unprepared for retirement.
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58% of Canadians are concerned about having enough money in retirement.
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26% of unretired Canadians (aged 55-64) expect to continue working in retirement to support themselves.
The study also states that a significant portion of homeowners, 42%, are counting on selling their property to fund their retirement.
The findings also suggest a concerning retirement outlook for unretired Canadian women where nearly two-thirds (62%) of unretired women aged 55-64 feel unprepared for retirement, compared to half (48%) of unretired men aged 55-64. Ingrid Macintosh, Vice President Wealth, TD Asset Management, says women are out-learning their male peers, so why aren't they out-investing them? Learn more about it in this article.
Last but not the least, 59% of unretired Canadians who have employer-sponsored retirement plans feel prepared for retirement.
Considering these findings, having a plan to invest in RRSP seems more crucial than ever and could potentially help build confidence about the future.
How much will you need to retire comfortably?
Without knowing how long retirement will last, planning how much to save may seem like guesswork. However, being realistic about the spending habits you expect to have can be helpful in defining your retirement portfolio's size.
There are different schools of thought regarding how much money you may need for retirement – as well as how to arrive at the percentage or dollar amount that you may require.
Savvynewcanadians.com indicates that to determine an actual required figure, you can multiply the yearly retirement expenses you expect to need x 25.
However, while newswire.ca reports that retirees could expect to spend approximately 70%-80% of their pre-retirement budget, Human Resources Director magazine (hcamag.com) suggests that Canadian employees may need 11 times their final pay to retain their pre-retirement standard of living when they retire.
The long and the short of determining how much retirement savings you will need will depend on each individual’s circumstances and requires planning.
2. Consider using RRSP contributions to help reduce your taxable income
Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return.
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The way an RRSP works is that it helps you save for the future while deferring tax. The amount you contribute to your RRSP is deducted from your taxable income in the year of the contribution. By the end of the year in which you turn 71, your RRSP must either be transferred to a Registered Retirement Income Fund (RRIF) or a Life Annuity, or be withdrawn in cash. A RRIF is designed to provide you with retirement income.
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In retirement, your other sources of income may potentially be lower than they were in the years you were funding your RRSP, and amounts withdrawn from the RRIF may, therefore, be subject to a relatively lower tax rate.
Did you know that the funds in RRSPs can be invested? After you've contributed to your RRSP account, you are able to invest the funds into a variety of financial products such as Guaranteed Investment Certificates (GICs), mutual funds, stocks and bonds (depending on the type of RRSP) to potentially grow the money that you've contributed. Since it's a tax-deferred account, taxes will be payable once you withdraw funds from the account. However, it is important to keep in mind that:
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An RRSP withdrawal (except for a withdrawal under the RSP Home Buyers' Plan or the Lifelong Learning Plan), will be reduced by withholding tax.
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The amount of withholding tax varies depending on the amount withdrawn and your place of residence. The withdrawn amount will be considered taxable income in the year withdrawn.
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An RRSP withdrawal (except for a withdrawal under the RRSP Home Buyers' Plan or the Lifelong Learning Plan) cannot be recontributed to your RRSP; the amount withdrawn is not added to contribution room for future years.
3. Take advantage of the RRSP contribution limit
The RRSP contribution limit for 2024 is 18% of your 2023 “earned income” – up to a maximum of $31,560, subject to any pension adjustment. The maximum for 2025 is $32,490.
You may want to consider maximizing the contributions within your RRSP contribution limit. The earlier you contribute and the more you contribute within your limit, the higher the potential benefits of tax deferral on income earned in the RRSP will be.
If you are beginning to plan to save for retirement , other considerations you may want to keep in mind can include your tolerance for risk, your time horizon, retirement expenses and returns after-tax that you may require, and inflation.
As you continue to save for your retirement, you may want to evaluate your retirement savings plan periodically, as this will help ensure that you are still on track, providing the opportunity to rebalance your portfolio and make changes if needed.
4. Harness the power of compounding on your RRSP investments
Starting to save for retirement at a younger age can help you take advantage of compound growth within an RRSP.
Although it's never too late to start saving for retirement, there are advantages to starting to contribute to your RRSP early. Compound growth occurs when income is earned not only on the funds you contribute to your RRSP, but also on the reinvested income from those original contributions.
5. Reduce your family's tax burden with a spousal RRSP
A Spousal RRSP allows you to contribute money to your spouse or common-law partner’s RRSP, up to your personal contribution limit. When a contribution is made to the spousal RSP, the contributor receives a tax deduction.
The difference between a personal RRSP and a spousal RRSP is that, with a spousal RRSP, one spouse is the annuitant (the plan holder or owner of the RRSP), while the other spouse (or common-law partner) is the contributor to the plan.
A Spousal RRSP can be helpful when there is a large difference in incomes between partners. Let's say you're the one with higher income. You contribute to a Spousal RRSP and end up using some of your contribution room in the process. However, in retirement, your spouse withdraws from it. This can be a way to efficiently defer taxes in the current year as well as benefit from withdrawals, which will be taxed based on the marginal tax rate of the lower-income earner.
Making regular RRSP contributions could help you save for retirement. For more details on RRSPs, check out "What is an RRSP and how it works".
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