RRSP facts, “do’s” and “don’ts” this year and beyond!
Welcome to another “RRSP season” folks!
To help you make the most of your Registered Retirement Savings Plan (RRSP) before the RRSP contribution deadline, I thought I would list some of my favourite RRSP facts for this tax year and beyond including some quick tips and reminders.
RRSP facts, “do’s” and “don’ts” this year and beyond!
- Are you stressed about the RRSP contribution deadline? Stop the stress. As part of your final contributions for this tax year, I encourage you to set up automatic contributions for this coming year.
- What’s your RRSP contribution limit? I know mine thanks to my most recent Canada Revenue Agency (CRA) Notice of Assessment. The answer for you might be 18% of your earned income. This includes employment income, net rental income, self-employed income and more. So, unless you’re a member of a workplace pension plan or profit sharing plan then your RRSP contribution room should be up to 18% of your earned income (not adjusted for these pensions above) to a maximum annual contribution amount.
- Is there really a maximum contribution amount? You bet. CRA keeps tabs on that too! Read on…
The total amount you can contribute to your RRSP each year is made up of your contribution limit for the current year plus any “carry-forward” contribution room from previous years.
Other RRSP facts and tips in any year!
- An RRSP is an account, not a mutual fund or an investment itself. Please stop saying “I have to buy RRSPs!”
- Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
- Some Canadians shouldn’t use an RRSP (their income may not be high enough (yet) to reap the key benefits of this account). Why do I say that???
- RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
- There are really two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction from your contribution, and
- tax-deferred growth.
Should you spend my RRSP-generated tax refund on a trip?
Please don’t!
Do you have to make my RRSP contributions in February?
Nope!
Contributions to an RRSP for the current tax year do not always have to be made in February – see above – every month can be “RRSP season” with automatic, monthly contributions. That’s what I do.
Can you have more than one RRSP?
Yes. But I think it gets a bit complex. Best to keep one RRSP at one financial institution.
If you have a Group RRSP at your workplace, definitely consider contributing to it though!
What types of RRSP accounts exist?
A common type of RRSP is an individual RRSP, registered in the name of the person contributing to it. There are also spousal RRSPs and group RRSPs.
You should also know that RRSPs can be managed by a professional money manager but you can do-it-yourself (self-directed) – the latter is what I do!
So, you can open what is called a Self-Directed RRSP account.
This way, you can decide on your own what ETFs, stocks or bonds to purchase and when.
Read on about the low-cost ETFs I own for wealth-building here.
You keep saying RRSPs are tax-deferred, do I have to pay taxes eventually?
Yes!
Remember, there are really two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction from your contribution, and
- tax-deferred growth.
But you’re not rich as you think: when you take money out of the RRSP account you have to pay tax.
Now, some exceptions apply: RRSPs can be used for home purchases and education and there are programs associated with the RRSP for this. See below for my takes on these.
If you’re taking money out of your RRSP before you retire, before turning your RRSP into a Registered Retirement Income Fund (RRIF), you’re immediately going to pay a *withholding tax (with some exceptions):
- If you take up to $5,000, you’re going to pay 10%.
- If withdrawals are between $5,000 and $15,000, the financial institution will hold back 20%.
- If you withdraw more than $15,000, 30% is held back.
*Quebec has different withholding tax rates.
When you take your money out of your RRSP, you have to report the amount you take out on your tax return as income. At that time, you may have to pay more tax on the money — on top of the withholding tax. It depends on your total income and tax situation.
Other RRSP uses?
There are two programs you can use to take money out of an RRSP without incurring taxes – but be careful!
1.The Home Buyers’ Plan (HBP) allows you to take tens of thousands out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. That’s the good news. The bad news? You’ll have to pay that back into your RRSP over the next 15 years.
2.The Lifelong Learning Plan (LLP) allows you to take out up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your or your spouse’s education. You can’t use it for your child’s education – this is where RESPs come into play. You do have to pay back 10% per year for up to 10 years.
These are just some of the RRSP facts and uses you need to know!
RRSP “do’s” and “don’ts”
- Do use the RRSP to reduce your reduce your taxable income. If you’re in a high tax bracket, investing an in RRSP could help push you into a lower one. You’ll also receive a tax deduction and potentially a tax refund associated with your RRSP contribution which you should re-contribute.
- Don’t really bother with the Home Buyers’ Plan. Gasp! With the TFSA now in place I see no reason why you should do this.
- Don’t consider the RRSP-generated tax refund as a financial windfall. It’s essentially a tax-deferred government loan to you.
- Don’t contribute to an RRSP if your earned income is less than $50,000. I think it makes far more sense to maximize contributions to your TFSA first. The TFSA is the perfect investing account or savings account for every Canadian, including those in lower tax brackets who will end up in a similar income bracket in retirement. The TFSA is also an ideal account for any investor who cannot or will not max out their RRSP contribution room.
I’ll continue to maximize contributions to my TFSA every year because…
- Don’t bother with any RRSP loan. More debt or loans are generally a bad idea. While a short-term loan to contribute to your RRSP might sound like a good idea – let’s face it – borrowing for investing is not generally a good idea for most of us. We’ve all seen and read the reports: Canadians are terrible at managing debt. Don’t dig yourself another hole. If you cannot afford to make regular RRSP contributions then you shouldn’t be thinking about an RRSP loan. Just me.
For many Canadians, to reap the BIG benefits of this tax-deferred account they should maximize contributions (based on their high earned income – see above); automate their contributions; keep their investment fees inside the account low; and avoid making their withdrawals for as long as possible.
What’s your take on RRSPs? Use them? Maximize contributions to them? Don’t care? I want to know.
Other RRSP reading:
The best ETFs for your RRSP to invest in the U.S. market.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Very thorough piece for all questions regarding RRSP. Maybe one more question can be added here: can one have too much RRSP?
We are actually debating if we should continue to contribute to RRSP or not. Of course, we will continue to contribute until we get the corporation match for the group RRSP. Other than that, should we contribute more RRSP? Although the decision made to still max out the RRSP, I really did not do enough calculation whether or not we might trigger OAS clawback and if that will make more RRSP not worthwhile. Too many variations here and any projection actually won’t be accurate.
I guess I will just see what happens at the day we actually retire. We can always withdraw more before 70. Can also borrow on heloc to invest so that we can write down the interest and speed RRSP meltdown. The latest time we retire won’t be over 60, so 10 years is a very long period to meltdown RRSPs I assume.
I’ve always figured having a tax problem in retirement or while working, is a good problem to have. It means you make good money/income. 🙂
I can only speak for us May, but it is my/our plan to max out TFSAs and RRSPs for another 3.5 years. Our debt is done then, then my wife and I will assess where we are – re: more full-time work, we enjoy it, etc. or semi-retirement with part-time work.
Even though I have a small workplace pension as does my wife in her financial future, we’ve maxed out all RRSP contribution room in our 40s.
If you retire at 60, you can still leave TFSAs intact, and any taxable income intact as well, and simply draw down RRSPs for a decade to reduce that potential, future liability with OAS clawback concerns. OAS clawbacks, for the most part, are a good problem to be worried about!
Yeah, tax problem is always a problem to have. The plan is to leave TFSAs intact and continue to max it out every year until we have to touch it.
We will definitely not touch the capital of our taxable account in the early years but will spend the eligible dividends from there. Eligible dividends almost free of the tax with our moderate plan.
Right now we have lots of dividend stocks in our RRSPs. I am thinking to gradually increase US stocks there and also gradually switch to some ETFs considering dividends does not have any tax benefit in a RRSP.
Ya, I’m biased and conservative with my portfolio so I intend to:
1. live off dividends in early years/semi-retirement years while working.
2. draw down RRSPs slowly over 20 years or so to smooth out taxes.
3. keep TFSAs “until the end” as to maximize tax-free growth so….
4. I can defer CPP until age 70 possibly.
That’s the plan 🙂
Mark
lol…walk down memory lane.
LOL.
Mark
YMMV = your mileage may vary.
A rental is sort of a business and you should be able to write off accounting fees such as a tax program against rental income. If it was me, and I had the money laying around (not held for a specific purpose in the short term), I’d be into RRSPs to prevent paying the government.
+1 for me too. Then figure out how to get out of that issue next year – with 10 months to go to move some assets around for 2019 tax year.
I agree. Sounds like the refinance will fix the extra cash flow that sounds like it caused the tax “problem” being discussed.
Hi Lloyd. YMMV? We don’t have a business anymore. Just trying to figure out if we should just pay govt extra $7000 in taxes or if we should use savings (which came from a refinance on rental mortgage) to contribute to rrsps so that we don’t have to pay the extra $7000 in taxes. Thanks if any of that makes sense. I suppose I should chat with our bank?
Hi there. I overlooked rental income and now we might have to pay $7000 more in taxes which I really don’t want to do. Would it be worth tapping into money we have put aside from a refinance on the rental mortgage (that tenants are paying down) and “contribute” (not buy ;)) to rrsps and spousal rrsps to offset that $7000 (wondering also how much we’d have to contribute to offset that $7000). I work for bc govt as a teacher and have a good pension and my husband has been self employed for the most part with no pension or rrsps. I really loathe the idea of giving the govt more of our hard earned money. The rental didn’t have very many right offs, thus the income showing on it that’s affecting our taxes. Thanks for any tips there.
Hi Trudy,
Tough question I can’t really answer unfortunately – I don’t know all the details of your finances, goals, other.
What I can say is, from my own experience and bias, I would avoid raiding your RRSP to pay for any short-term financial need. Use other cash savings, your emergency fund, use a line of credit for a few months if really, really you have to – but using your RRSP to cover short-term needs is not really a great idea. Just me!
I meant to add – there is no major harm now in not contributing to your RRSP to pay off debt now/taxes owning now.
All the best.
Mark
Hi mark. We don’t have any rrsps to raid. I’m wondering if we should contribute to rrsps to offset the additional $7000 in taxes that we will owe the govt. I don’t want to give the govt another $7000. We have a stash of money sitting in a savings account that we can use for RRSP, pay down mortgage, or rental renos or truck camper. Hmmm
Ah, I see now…sorry…I was confused with the wording about “…would it be worth tapping into money we have put aside…” which I thought was inside the RRSP.
For what it’s worth, we try and do a bit of everything. So, we strive to max out TFSAs (done); and max out RRSPs (mine is done) every year.
Maybe a good answer is this from me: if I had $7K due to the government owed/planned to owe this tax year, I would probably contribute to my/our RRSPs to the point whereby that taxable income was reduced this tax year as much as possible and then starting very soon – work on ways to ensure I don’t owe the gov’t another $7K next year and find myself in the same dilemma!
Good luck Trudy – not easy stuff to decide upon.
Trudy, you mention “might” have to pay another 7K. I’m no tax expert but I think the first step is to use a tax program to calculate this accurately. Even taxtips.ca along with the rental schedule should do it. This will confirm whether you owe and need to do anything. 7k tax owing is a lot and without knowing your incomes I’d still guess that might be 20K rental income you “overlooked”. I’d also guess your RRSP contributions would need to be in that same neighbourhood to offset the tax.
Note this doesn’t cancel your taxes, it defers them in an RRSP until withdrawal time and allows tax free growth in the meantime. Whether any of this makes sense would depend entirely on many factors with you and your husband that we aren’t privy to.
Good luck.
When I was working and had occasion to have some *extra* income that would result in a substantial tax bill I pretty well always bought some RRSPs so as to avoid said taxes. Both the wife and I were in DB pension plans but never hesitated to go down the RRSP road.
Having said that, there are variables that can come into play and personal situations that may need to be considered so YMMV.
As to how much, I use a tax program that allows one to *play* with the numbers to see the possibilities. These are not expensive and can likely be written off against the business income.
Same re: I always feel contributing to the RRSP account now, while working, even if I have a DB pension – will create a nice tax problem to have in retirement.
I hope I have a tax headache in retirement – owing too much money. It means I saved plenty enough like some readers on this site 🙂
A decent portion of our RRSP contributions were from several back pays due to contract issues as well as two severance payments each. I could go back and get the exact breakdown as I kept that info on my spread sheets but I ain’t that motivated. The choice was to accept them as income and pay a whopping tax, or have them paid directly to the RRSPs with no withholding on it and deal with it later. Seemed like a no brainer to me.
Likely one of your best financial decisions: go with the tax-deferred RRSP and deal with it later!
In regards to the Home Buyer’s program.
An associate at work and his wife had been saving for a couple years in a savings account for a down payment on a home. They were saving in a savings account, that paid essentially zero interest.
They are short about $10,000 on the down payment on a place they love. They had planned to borrow this from some third party lender at 19% interest.
I suggested that an alternate strategy would be to pop the $50,000 they had into RRSPs, which would generate pretty close to that $10,000 they need in tax refund. Then withdraw under the home buyer plan and they should have the down they need.
Was this poor advice? (let’s set aside the fact they have no savings at all, I did mention several times that perhaps they shouldn’t be owning a home…but I digress…)
Thanks for sharing Rob.
I think anyone short on their down payment obligations shouldn’t buy a home. Blunt I know but houses are not cheap and not guaranteed to rise in price while being an expense!
I stand by my thoughts – given couples can now have >$120K tax-free to put down on a house, why would you need the RRSP HBP? That’s borrowing money from your future self. I wouldn’t do it given TFSA contribution room now. Just me 🙂
Yep, my thinking too. Good points all.
I never agreed with the creation of the home buyers plan.
Robbing RETIREMENT savings, overboosting the prices of homes, stretching too much for a home…..None of these sound like positive things with a good outcome.
Just a word of caution if your colleague did not already have an RRSP account with sufficient funds to meet their down payment needs. My understanding is that the funds have to have been in the account for a minimum of 90 days before they can be accessed under the Home Buyer’s program.
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan/withdraw-funds-rrsp-s-under-home-buyers-plan.html
Thanks for that Brian and yes, some nuances there for sure related to HBP.
I do find the challenge with HBP is the program is rather and overly complex. Thoughts?
Mark, while I agree the detailed rules are a bit of a dog’s breakfast, if a prospective buyer doesn’t understand them and isn’t willing to take the time to consult others who do or have gone through the process, that’s probably the surest sign they shouldn’t raid their RRSP. My daughter is searching for a new home and flat out rejected going this route, preferring to use her TFSA resources as you suggested. If you were very close to that 20% down payment threshold, then I could see tapping enough from the HBP/RRSP to bump you over and avoid CMHC insurance (relying on term insurance instead).
Very smart Brian re: TFSA over RRSP for saving for a home but I’m biased on that. I’ve never liked the HBP for a few reasons but I know some folks swear by it because that’s the only way they could have afforded to buy a home.
I believe that is saying something right there 🙂
Great post, Mark. Very useful summary of very necessary information. And the following conversations are eye-opening. Thanks, as always.
Additional (perhaps unnecessary) point: the CRA does allow up to 2K in over-contribution, as long as no tax deduction is claimed on the over-contributed amount.
Totally agree and I could have included the $2K over-contribution limit in my post but I suspect most investors don’t have to worry about that. Saving and investing in your RRSP is the hardest hurdle most Canadians have to get over! All the best Pras.
Kinda off topic but I got my six CPP estimates from Doug last week. I was mildly surprised at how small the effect is of not working since age 55. I had envisioned once one had used up their drop-out provision the effect would be more pronounced. Now I have to sit down and figure out what to do. Lots of things to consider but so far I’m leaning to taking it earlier and preserving the RRSPs rather than deferring the CPP and using the RRSPs. This is probably not the best financial plan from a strict dollars and sense stance but with the wife being disabled I feel that a large RRSP is like an insurance policy and will be better than using up some of it up in order to get a larger CPP that will basically cease when I die. Of course I could change my mind again tomorrow. 🙁
I’m not surprise re the drop out difference etc having done my own calculations.
That’s certainly a key consideration with delaying and offset reducing one’s own assets first – the potential near loss of the spouse’s CPP.
I’m getting used to pounding down the registered now and think we’ll be rolling the dice the other way-delaying to at least 65 or more, but like you could change my mind at any time!
Great that you got some great data from Doug. Not surprised, he seems very genuine with his numbers and out to really help investors.
A large RRSP is better (all things being equal) I think since it provides financial flexibility. Continued success to you Lloyd, you’ve done well! 🙂
Wow, that’s a lot of information! I can see how a newbie can be overwhelmed with all the rules and guidelines around RRSPs.
I inadvertently over-contributed to my RRSP for tax year 2017. I immediately withdrew the amount when I discovered my error, but didn’t expect the nightmare that I’m still facing trying to rectify this with the CRA. I filled out the overly-complex T1-OVP form, and paid the tax owing, but the CRA continues to re-assess and comes up with different assessments. I’m hoping it will be over soon, but it’s stressful (to me) being in the CRA’s cross-hairs. I’m just putting it out there that you should double (or even triple) check your contributions against your limit.
Great reminder Vito: “I’m just putting it out there that you should double (or even triple) check your contributions against your limit.”
When in doubt too, with one phone call, people can call CRA. Good luck on your work with them!
Great summary of RRSPs.
It was good to advise people they may have some additional tax owing in addition to the rules based withholding taxes.
However I think it prudent to also point out in retirement people could well have a refund coming instead, and arguably may be much more likely, depending on amounts and other income. Withholding tax rates are relatively high for moderate amounts of RRSP withdrawals, at least with amounts at the lower end of the 20% & 30% tax levels. There is clearly an assumption by government you have other (significant) retirement income, or perhaps that you are withdrawing while still working having not established a RRIF instead. For example in my Province if a person made a 6K withdrawal @20% withholding tax they would need approx. an additional 40K of regular income to justify that avg tax rate-46K total. For a 15K withdrawal @30% withholding they would need approx an additional 90K of regular income to justify that avg. tax rate-105K total. These amounts would be even higher if some income was from dividends.
It’s probably not big money but I prefer taking multiple RRSP withdrawals to avoid providing a free loan to the govt for a year plus.
I think that’s a great point about RRSP withdrawals – sure, the withholding tax is annoying but if you make a few withdrawals throughout the year you can almost assure you avoid those free loans.
It is my hope more people realize the any RRSP-generated refund is just that – a tax-deferred government loan.
Yep, but people will have to weight any potential cost of an RRSP withdrawal vs extra up front temporary taxes. Mine is free so I don’t concern myself with limiting frequency. Alternatively someone might want to just establish an RRIF for part of their funds and set up a suitable % of withdrawal and proper tax rate from the get go. Probably what CRA expects most to do and what I’d do if it cost $50/withdrawal.
Yes, it’s a good point taxes will be owed on your RRSP. (You’re not as rich as you think)
Thinking of it as a tax deferred government loan is probably a really good idea for many people. Although I’ve never thought of it that way since loans I’m familiar with have a known interest rate & cost, principle amount, maturity date etc. so harder to get my head around it. For me what works is to simply consider it the same as when I was working- all RRSP withdrawal outflows are like gross employment income- (taxable), and I can have some influence on what those tax rates are with determining amounts on withdrawals. If I can keep the effective avg tax rate on withdrawals lower than the effective avg tax rate when I contributed there the benefit is even greater than the TFSA. Right now I estimate that is about 60% of working effective tax rate for most of my career. Not sure how many more years that might apply here. But I am hoping to continue to utilize those withdrawals to continue to conribute and take advantage of our other GREAT Canadian program- the TFSA for the foreseeable future.
I like the call on the RRIF. Folks should be aware that this an excellent solution to starting drawing down their portfolio vs. RRSP lump sum withdrawals and the RRIF can also be a great way to smooth out some taxes.
In addition, investors don’t need to convert the entire RRSP to a RRIF, say convert $250K of a $500K RRSP portfolio. I will likely consider this at some point in the coming decade or so.
I love the other GREAT Canadian investor account too (TFSA)! It’s not unrealistic that by next year, some couples might have $100K each in these accounts. Great tax-free money when you think about it. I hope I am one of them!
Yes, I think that’s the best idea for most. I have my smaller LIF set up for min payments, but RRSP still as I go withdrawals.
Indeed, we’re fortunate to have both of these great savings/retirement options.
Drives me crazy too when people say they are going to buy some RRSP’s! Your comment made me laugh! Thanks, Steve
LOL. I wrote it in the post because I hear that crap too Steve! 🙂
Thx
Mark
Hi mark, rrsp question.. the wife and I have our tfsa’s maxed and our rrsp’s maxed. I didn’t do rrsp contributions for the past 3-4 years but in November/18 I put in 70k to catch up so I’m maxed. I made 100k in 2018, just trying to figure out how much rrsp I should use for my deduction?
Thx
Brad
Hey Brad,
In determining your RRSP deduction amount, you’ll need to review your tax files related to what you have claimed. You can also contact CRA and walk-through that with them. It’s not important what you made inside your RRSP, that’s tax-deferred gains, it’s important to understand what you have contributed and claimed as part of the deduction.
Cheers.
I’m surprised you did not include the “other use” for RRSPs you are planning for Mark. A “bridge” between working income and pension income. I was going to do it as well but plans changed for us. Actually, any kind of work sabbatical can be financed with RRSP funds. One just has to keep in mind that once used, that amount is gone. It can not be replenished.
In case one hasn’t noticed, I love RRSPs. Have since I was 19. Ya, the TFSA may have usurped top spot in my heart but I still believe that RRSPs are a handy tool to have in the old financial tool box.
Well, I could have included that and the rest of my RRSP plans but those are different posts entirely!
You’re right, it is my hope any semi-retirement can include some RRSP withdrawals and living off part of the portfolio (via dividends). That’s the game plan! The RRSP is very handy for many Canadians – as long as they use the rules to their advantage.
“Don’t contribute to an RRSP if your earned income is less than $50,000.”
I’d add a caveat to this one. A person can make a contribution to their RRSP and carry forward the deduction. So if one has some spare money and is going to have a higher income later, it may be beneficial to contribute and hold the claim for future years. This might also be a consideration when filing the taxes, only claim the amount to get one down to the appropriate bracket. No use claiming it all if one only needs a portion. This might get the money growing and sheltered earlier and we all *know* that time is an important factor in financial growth. Just an option.
Great point, they can carry-forward contribution room but I would argue unless you can max out your TFSA first, you shouldn’t worry about your RRSP.
For higher income earners, individuals making over say $80-90K per year, they should be able to max out their TFSA and likely contribute to their RRSP as well.
Thoughts?
For sure higher income earners would theoretically have more options but even a lower income person can contribute to their RRSP and get funds sheltered and growing and hold the actual deduction to be claimed in years with higher incomes. I’m thinking like a younger person that may inherit some funds as an example. Top off the TFSA, throw some in an RRSP, hold the deduction for later. Of course a new car usually wins out with “found” money but…..