RRSP Taxation – Benefits and Implications

Contributing to Your RRSP

RRSP contributions are capped at 18% of your previous year’s income, minus any pension adjustments, up to a maximum limit set by the Government of Canada. The maximum contribution limit for 2023 is $30,780. Contributions can be made throughout the year and within the first 60 days of the following year. You can find your contribution limit for the year by visiting My Account or MyCRA on the Canada Revenue Agency website.

When is the best time to start an RRSP?

When it comes to saving, it's always best to start early. The earlier you start, the longer you can benefit from compounding and market increases over time. Compounding occurs when earnings from interest and dividends are reinvested back into your RRSP and used to generate additional returns. The earlier you start to save, the potential for long term growth increases, and helps with achieving your retirement goal.

Discovering RRSP tax benefits  

Contributing to RRSPs provides several tax advantages.

RRSP contributions can lower your income tax

RRSP contributions can be deducted from your taxable income. That can help reduce your tax bill and may result in you getting a refund.

RRSP contributions may entitle you to certain credits and government social programs

Eligibility for various provincial and federal benefits, including the Canada Child Benefit, may be tied to your net family income. Since RRSP contributions are deducted from your net income, this could help make you eligible for these programs.

You can contribute to your RRSP now and postpone the tax reduction

If you expect your income to be higher in the future, you can defer claiming the deduction from income available from this year’s contributions, which can be particularly beneficial for people on parental leave or that were unemployed for a short time during the year. You won’t benefit from lower taxes this year, but your tax savings could potentially be higher in a future year.

Accelerate the impact of compound growth

The sooner you start to save, the longer you’ll have to benefit from compound growth. That’s when interest, dividends or other income you earn in your RRSP is reinvested within your RRSP and used to generate additional returns. Over the long term, reinvesting within your RRSP can help your savings grow faster.

You can use your tax refund to make further RRSP contributions

RRSP contributions are tax deductible. Those deductions can reduce your taxes and may result in you receiving a refund. Providing that you have sufficient contribution room available, depositing that refund into your RRSP will further reduce your taxable income and help you reach your savings goals sooner.

You can use RRSPs to fund home ownership or an education

RRSPs can help you save for more than your retirement. The Home Buyers’ Plan (HBP) lets you borrow up to $35,000 from your RRSP to buy a new home. You need to meet the conditions under the Income Tax Act, including being a "first-time home buyer" and a Canadian resident to qualify. You’ll need to pay back what you borrow within 15 years starting in the second year after you make a withdrawal. Repayments can be divided up equally over those 15 years. Amounts not repaid within the required timeframes will be treated as taxable income.

The Lifelong Learning Plan (LLP) lets you withdraw funds from a RRSP to help pay for an education. You can withdraw up to $10,000 a year, up to a maximum of $20,000 over four years, for full-time education or training for you, your spouse, or common-law partner. LLP funds withdrawn will need to be paid back over a maximum of ten years. 

Withdrawing funds from your RRSP can be easy, but there are several potential tax implications to be aware of.

How do you withdraw funds from a RRSP?

Funds withdrawn from a RRSP will be treated as income and taxed at your marginal tax rate. Most people wait until they retire to make withdrawals. At that point, you’re likely to be in a lower tax bracket than you were when you were working. If that’s the case, you’ll end up paying lower taxes overall. 

But you don’t have to wait for retirement to make withdrawals. If you want to withdraw funds from a RRSP to supplement your income, you can. Just be aware that your withdrawals will be subject to withholding taxes and will be added to your income unless they are being made under the Home Buyers’ Plan or Lifelong Learning Plan.

How are RRSP withdrawals taxed?

Funds withdrawn from your RRSP will be subject to withholding tax unless you’re making withdrawals under the Home Buyers’ Plan or Lifelong Learning Plan. The amount of tax withheld will be between 10% and 30% depending on how much you withdraw and which province you reside in.

RRSP withdrawals must be included in your tax return and may be subject to additional tax depending on your marginal tax rate. 

How do you transfer RRSP withdrawals to other retirement savings?

Funds held within a RRSP can be transferred to a Registered Retirement Income Fund (RRIF). Technically, this can be done at any time, but it's considered to be more beneficial if done at retirement age. Once a RRIF is set up, you’ll need to take minimum payments from your RRIF each year, which can provide you with a reliable source of retirement income. Withdrawals of the annual minimums will be taxed as income at your marginal rate and RRIF withdrawals above the annual minimum will be subject to withholding tax. You can learn more about RRIFs here.

What is my RRSP contribution and deduction limit for a year?

Your RRSP contribution limit is equal to 18% of your annual income, up to a maximum amount set by the government, plus any contribution room carried forward from previous years. The government prescribed maximum amount for 2023 is $30,780. If you can’t contribute the maximum each year, don’t worry. Any contribution room not used is carried forward to future years. If you’re part of a pension program, your RRSP contribution limit will be subject to a “pension adjustment” that will reduce the contribution room you have available.

How much of my RRSP can I use to buy a home?

You can withdraw up to $35,000 from your RRSP to buy a new home under the Home Buyers’ Plan. If you’re buying a home with a spouse, you can both make withdrawals for a total of $70,000. You need to meet the conditions for the HBP withdrawal, such as being a "first-time home buyer" and Canadian resident and will have to repay whatever you withdraw within 15 years, starting in the second year after you make a withdrawal. If you can’t make a repayment, the minimum repayment will be added to your taxable income for that year.

What are the benefits of investing in a self-directed RRSP? 

Self-directed RRSPs, or SDRRSPs, give you full control over your investments. You can hold several types of investments in an RRSP including stocks, bonds, mutual funds, ETFs, and GICs.

If I’m over 71, will my RRSP be transferred to other retirement savings? 

You need to close any RRSPs you own by December 31^st of the year you turn 71. At that time, you’ll need to either withdraw your funds, transfer them to a Registered Retirement Income Fund, or use them to buy an annuity.

What investment options are available for RRSPs? 

Several investment types can be held within a RRSP including:

• Eligible Canadian and foreign equities
• Eligible mutual funds
• Exchange-traded funds (ETFs)
• Savings bonds, government bonds, and corporate bonds
• Guaranteed investment certificates (GICs)
• Treasury bills
• Cash

RRSPs can make it easy to help save for retirement. They can also help reduce your taxable income and funds held within an RRSP are allowed to grow on a tax-deferred basis. Understanding the RRSP contribution and deduction limits, and taxation rules governing withdrawals, can help you get the most out of your RRSPs and reach your retirement goals.

And the best part is, all you need to do to start enjoying the tax benefits provided by RRSPs is open an account and start contributing funds. If you don’t already have one, you can open one quickly and easily today with TD Direct Investing.