Explore the benefits of a Registered Retirement Savings Plan (RRSP)
Planning for retirement often takes a back seat to more immediate financial goals, like saving for a new car or home. But the sooner you start investing for retirement, the sooner it will become a habit, and the more likely you’ll be able to achieve the retirement you want.
What is an RRSP?
An RRSP is a registered account that can be used for holding investments specifically for retirement. “Registered” means that the account conforms with tax rules administered by the Canada Revenue Agency (CRA). These rules determine how much you can contribute each year, what you can invest in, when you must terminate your RRSP and the implications of taking money out of your account.
Why choose an RRSP?
RRSPs have two key advantages. First, any contributions you make, up to your contribution limit, are tax-deductible and may reduce the income tax you pay in the year. Second, you won’t pay tax on your contributions or investment growth until you withdraw money from your RRSP. By the time you do so, your income may be lower, so you may be taxed at a lower rate.
If you expect to have a much higher income than your spouse at retirement, you may be able to gain additional tax advantages by contributing to a spousal RRSP. When you make contributions to your spouse’s RRSP, you still get the same tax deduction you would if you were contributing to your own RRSP. But when your spouse eventually makes withdrawals from the RRSP it may be at a lower tax rate because of his or her lower level of income.
RRSP contribution limit
The annual limit is 18% of your income from the previous year, up to a maximum of:
- $31,560 for the 2024 tax year
- $32,490 for the 2025 tax year
Unused contribution room can be carried forward.
Making the most of your RRSP
The earlier you start investing in an RRSP, the more time your money has to grow. Even if you cannot afford to make the maximum RRSP contribution this year, starting today is better than not starting at all. Here are some tips to help you make the most of your retirement savings in an RRSP.
Know the contribution deadline
The deadline to contribute to an RRSP for any given tax year is 60 days into the following calendar year.
Invest regularly and for the long term
Trying to time the market is difficult, if not impossible. Many advisors recommend staying invested through the market’s ups and downs, and not letting short-term market volatility influence your investment decisions.
Staying disciplined with investing can be as easy as setting up a pre-authorized contribution (PAC) plan at your financial institution. With a PAC you automatically contribute a set amount each month to your RRSP, regardless of how the markets are doing. Choose an amount that fits within your budget and make investing in your RRSP a habit.
Diversify
RRSPs can hold many types of investments, from low-risk Guaranteed Investment Certificates (GICs) to higher-risk (and potentially higher-return) equities. You can reduce the impact of short-term volatility by choosing a portfolio of well-diversified investments.
iA Clarington offers a wide range of funds and Active ETFs managed by skilled and experienced investment professionals. Your financial advisor can help you select the iA Clarington funds that are best suited to your needs, risk tolerance and investment time horizon.
Borrowing to invest
In some cases, it can make sense to borrow money to invest in your RRSP, rather than not making a contribution at all. Look for a loan with a low interest rate, and pay off the loan with the tax refund you’ll receive from claiming your RRSP deduction on your tax return.
This approach may not be right for everyone. Your financial advisor can help you decide whether borrowing to invest in your RRSP makes sense.
Other ways to use your RRSP
Taking money out of your RRSP before you retire is generally not recommended. You’ll pay tax on the money you withdraw and it will no longer be able to grow tax-deferred to help fund your retirement.
But there are two government programs, the Home Buyers’ Plan and the Lifelong Learning Plan, that let you borrow money from your RRSP without penalty.
The Home Buyers’ Plan lets you borrow up to $35,000 from your RRSP (or $70,000 per couple) to help you buy or build your first home. You must start paying back the borrowed amount in the second year after you buy your home, and you must repay the entire amount within 15 years. Any amounts not repaid as required will be included in your taxable income.
The Lifelong Learning Plan lets you borrow up to $10,000 a year from your RRSP, to a maximum of $20,000 in total, to go back to school full time. You’ll need to start paying back the money you borrowed in the second year after you stop going to school full time, or by the fifth year after making your first withdrawal. You must repay the entire amount within 10 years and any amounts not repaid as required will be included in your taxable income.
Contact your financial advisor today to learn how an RRSP from iA Clarington can help you achieve your financial goals.
For definitions of technical terms in this piece, please visit iaclarington.com/glossary and speak with your investment advisor.
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