10.3.3 Registered savings plans

From: Financial Consumer Agency of Canada

Registered savings plans are special accounts that are registered with the Canada Revenue Agency. They allow you to hold and invest money while reducing the amount of tax you pay. Registered savings plans are also called sheltered investments because they shelter you from paying tax.

Registered Retirement Savings Plan

How it works

You do not pay income tax on money that you deposit into a Registered Retirement Savings Plan (RRSP), which is registered with the federal government. Also, you do not pay income tax on any money the plan earns until you take it out. If you are in a lower tax bracket at that time, such as after you retire, then you will pay less tax than you would have when you first deposited the money.

You can choose how to invest the money in the account. You may invest it in stocks, bonds, mutual funds, guaranteed investment certificates or other investments. Returns may be guaranteed or they may not—and some types of investment may lose money.

The maximum amount you can put into an RRSP depends on your income. It's listed on the Notice of Assessment that the Canada Revenue Agency sends you when you file your annual tax return. For example, the maximum limit for 2020 is $27,230. If you did not contribute your maximum in previous years, you can carry forward unused contributions and add them to the amount you can put into an RRSP in following years.

In the year you turn 71, you must collapse your RRSPs. At that point, you have a number of options. You can withdraw the funds and pay the tax, purchase an annuity or transfer the RRSP assets to a registered retirement income fund (see the RRIF section).

For details, go to Canada Revenue Agency's information on Registered savings plans

Tip

February is the last month you can put money in your RRSP to get a tax deduction for the previous year. But don't wait until February. Invest as soon as you can in the year so you can benefit from the earnings throughout the year. Make regular contributions—consider contributing either monthly or from every paycheque—and your savings will start to grow sooner.

How much it will be worth

How much your RRSP will be worth when you retire depends on several factors: at what age you start investing in your RRSP, how much money you put in each year, what rate of return you get on your investments and at what age you retire. Here are two examples.

Example: Antonio is 35 years old. He already has $30,000 in RRSPs and plans to invest $5,000 each year until he retires at 65. How much might his RRSPs be worth?

Value of Antonio's RRSP at retirement
RRSP information Antonio

Amount Antonio has in RRSPs now

$ 30,000

Amount of money he'll invest each year

$ 5,000

Average return he'll earn each year

3%

Antonio's age at retirement

65

Estimated number of years he'll be retired

20

Worth of Antonio's RRSPs at age 65

$310,695

Estimated amount this will pay each year for 20 years

$ 20,885

Example: Twin sisters Amy and Amanda both contributed to an RRSP, but starting at different ages and for different lengths of time. How much will their RRSPs be worth at retirement age?

Value of Amy's and Amanda's RRSPs by retirement age
RRSP Information

Amy

Amanda

Age at which she started to save

20

30

Amount contributed each year to an RRSP

$1,000

$1,000

Number of years she contributed

15

35

Total amount she saved

$15,000

$35,000

Average return she received each year

6%

6%

Value of her RRSP at age 65

$141,700

$118,100

Even though Amanda contributed $20,000 more than Amy, Amy ended up with $23,000 more due to compound interest. Clearly, starting to invest early can really pay off. If you wait even 10 years to start saving, you will have to save a lot more money, over many more years, to come out ahead.

To find out what your RRSPs could be worth when you retire, use the RRSP savings calculator from the Ontario Securities Commission.

Tax-Free Savings Account 

A tax-free savings account (TFSA) is a registered plan that lets you save for whatever goal you like. You do have to pay income tax on the money you contribute, but you do not pay tax on the money you make investing your savings, including capital gains. There's no tax even when you take the money out of the account.

  • The annual contribution limit was $6,000 in 2018 and 2019.
  • You begin to accumulate contribution room in 2009, or the year you reached the age of 18 if that is more recent.  If you did not contribute the maximum amount in any given year, the unused contribution room can be carried forward.

You can also take money out of a TFSA and put it back again the next year. These features make TFSAs very flexible. To check how much TFSA contribution room you have available, go to Canada Revenue Agency's information on The Tax-Free Savings Account or call 1-800-959-8281.​

A TFSA can include any type of investment, such as stocks, bonds, mutual funds, guaranteed investment certificates or other investments. Returns may be guaranteed or they may not.

Is an RRSP or a TFSA a better choice?

Both RRSPs and TFSAs offer tax advantages. Both may be useful for your savings goals. The chart summarizes the main differences.

Comparison of RRSPs and TFSAs
Factors to consider

RRSP

TFSA

Saving purpose

  • Aimed at saving for retirement
  • Useful for saving for longer- or shorter-term goals

Tax advantage

  • When you put money into an RRSP, you can deduct that amount from your taxable income, so you don’t have to pay income tax on it until you take it out of the plan. You may pay lower taxes when you take the money out if you are in a lower tax bracket then.
  • You may withdraw money from an RRSP for certain purposes, such as buying your first home or financing your education. However, you have to pay it back within a limited period of time.
  • When you put money into a TFSA, you must pay any income tax due on the money you contribute. But you do not have to pay tax on the money when you take it out.

Time limit

  • You have to close an RRSP after age 71 (at which time you may open an RRIF; see the section on RRIFs for more information).
  • There is no time limit for contributing to a TFSA.

When you pay the taxes is the main difference between an RRSP and a TFSA. It's important to understand how that timing will affect your total savings.

Tip

When you are starting to create a retirement income, focus on the source of cash that will generate the smallest tax burden first, and then use other sources later. For example, a TFSA provides a source of cash with no tax consequences. This allows you to give your RRSP a chance to grow until you need more income, or until you reach age 71 and have to start withdrawing funds.

See the video, Saving with registered plans for more information.

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