What is an RRSP?
An RRSP (Registered Retirement Savings Plan) is a type of account in Canada designed to help you save for retirement while reducing your taxes.
When you contribute money to an RRSP, you can deduct that amount from your taxable income, which often results in a tax refund.
How does an RRSP work?
An RRSP allows you to invest money and delay paying tax on it until you withdraw it later in life.
Here’s how it works:
- You contribute money to your RRSP
- You get a tax deduction for that contribution
- Your investments grow tax-deferred
- You pay tax when you withdraw the money
This makes RRSPs especially useful for people who expect to be in a lower tax bracket in retirement.
What can you hold in an RRSP?
Inside an RRSP, you can hold many types of investments, including:
- Stocks
- ETFs (exchange-traded funds)
- Mutual funds
- Bonds
- Cash
Many beginners choose simple ETFs because they are low-cost and diversified.
What is the RRSP contribution limit?
Your RRSP contribution room is based on your income.
Each year, you can contribute up to:
- 18% of your previous year’s earned income
- Up to a maximum limit set by the government
If you don’t use all your contribution room, it carries forward to future years.
What happens when you withdraw from an RRSP?
Unlike a TFSA, RRSP withdrawals are taxed as income.
This means:
- You will pay tax when you take money out
- Your financial institution may withhold some tax upfront
Because of this, RRSPs are best used for long-term retirement savings.
TFSA vs RRSP: which is better?
Both accounts are useful, but they serve different purposes:
- RRSP: reduces your taxes now, but you pay tax later
- TFSA: no tax deduction, but withdrawals are tax-free
For many Canadians:
- Use a TFSA first if your income is lower
- Use an RRSP more as your income increases
When should you use an RRSP?
An RRSP may be a good choice if:
- You want to reduce your taxes
- You are saving for retirement
- You expect to be in a lower tax bracket later
How to start an RRSP
Getting started is simple:
- Open an RRSP account
- Deposit money
- Choose your investments
Many Canadians use simple, beginner-friendly platforms to invest automatically and keep fees low.
Final thoughts
An RRSP is a powerful tool for long-term savings and tax reduction in Canada.
When used correctly, it can help you build wealth over time while lowering your tax bill today.
If you’re planning for retirement, understanding how RRSPs work is an important step in building your financial future.