RRSP: What It Is and How It Works

What it is

A Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement account. Contributions reduce your taxable income in the year you make them, investments grow tax-sheltered inside, and you pay tax when you withdraw — ideally in retirement, when your income (and tax rate) is lower. Like a TFSA, it’s a container: it can hold cash, GICs, stocks, ETFs, bonds, and mutual funds.

How it works

Contribution room. Each year you earn 18% of the previous year’s earned income (mostly employment and self-employment income) as new RRSP room, up to an annual maximum that the government indexes each year — check current limits on the CRA website. Unused room carries forward indefinitely. Your exact available room appears on your CRA notice of assessment and in CRA My Account.

The deduction. Contributions are tax-deductible: contribute $5,000 and your taxable income for the year drops by $5,000. The contribution deadline for a given tax year is the first 60 days of the following calendar year.

Growth. Everything inside grows tax-deferred — no annual tax on interest, dividends, or gains while the money stays in the plan.

Withdrawals. Withdrawals are added to your taxable income for the year. On top of that, the institution withholds tax at source: 10% on amounts up to $5,000, 20% on $5,001–$15,000, and 30% above $15,000 (Quebec has its own rates). That withholding is just a prepayment — the final tax depends on your total income.

Two special withdrawals. The Home Buyers’ Plan lets first-time buyers withdraw for a home purchase, repaid over 15 years. The Lifelong Learning Plan lets you withdraw for your own (or your spouse’s) education, repaid over 10 years. Amounts and eligibility rules change — check current limits before planning around either.

The endgame. By December 31 of the year you turn 71, the RRSP must be converted — usually to a RRIF (Registered Retirement Income Fund), which pays you taxable income in retirement, or used to buy an annuity.

What it’s used for

Retirement saving, first and foremost. The deduction is worth more the higher your tax bracket, so RRSPs shine brightest for solid earners who expect a lower income in retirement.

Who it’s for: employed and self-employed Canadians building retirement savings, especially middle-to-high earners.

Who it’s NOT for: an emergency fund. Withdrawals are taxed, hit with withholding, and — critically — the contribution room is gone forever. Unlike a TFSA, withdrawing from an RRSP does not restore room.

Who provides it in Canada

Every Big Five bank, digital banks, and all major brokerages offer RRSPs: Wealthsimple Trade and Invest, Questrade, and every bank-owned brokerage (RBC Direct Investing, TD Direct Investing, BMO InvestorLine, Scotia iTRADE, CIBC Investor’s Edge). Robo-advisors can manage one for you.

What it costs

The account itself is typically free at online brokerages — most charge no annual administration fee for RRSPs. Your real costs are whatever you hold inside: ETF MERs, trading commissions, and currency conversion fees. Check current fee schedules; they change.

Newcomer notes

You generate zero RRSP room until you earn income in Canada and file a Canadian tax return. Your first room appears after your first filing — based on that year’s earned income. So a newcomer who arrived in 2025 and filed for 2025 gets their first RRSP room in 2026.

You need a SIN to open an RRSP. And don’t confuse it with a TFSA: TFSA room starts with tax residency, RRSP room starts with earned income. Contributing to an RRSP with no room triggers the same 1%-per-month overcontribution penalty as a TFSA.

Risks / watch-outs

• Withdrawals are taxed — plus withholding at source, plus the room is permanently lost. Treat it as locked away until retirement (outside the HBP/LLP).
• Retiring wealthy has a wrinkle: large RRIF withdrawals can trigger OAS clawback in retirement. High earners should plan for this.
• Currency and market risk sit with you — the tax shelter doesn’t protect against bad investments.
• Deadlines matter: miss the first-60-days contribution window and the deduction slides a full year.

FAQ

RRSP or TFSA — which first? It depends on income. Lower earners often do better starting with a TFSA (no deduction to waste, tax-free withdrawals won’t affect benefits). Higher earners usually benefit more from the RRSP deduction. Many people use both. When in doubt, the TFSA’s flexibility makes it the safer first step.

Can a newcomer open an RRSP? Yes, with a SIN — but with no earned income in Canada yet, you’ll have no contribution room. Open it when room appears after your first tax filing.

What happens to my RRSP if I leave Canada? You can keep it. Withdrawals as a non-resident are generally subject to withholding tax (often 25%, though tax treaties can reduce it). Get cross-border advice before acting.

What is a spousal RRSP? An RRSP you contribute to in your spouse’s name. It lets the higher earner use their room and deduction while building retirement assets taxed in the lower-earning spouse’s hands later — a classic income-splitting tool, with attribution rules to respect.

Does my employer pension affect RRSP room? Yes. Pension adjustments from a registered pension plan reduce your RRSP room for the following year. Check your notice of assessment rather than guessing.

Educational content only — not financial advice. Rules and promotions change; verify current details with the provider or CRA.