What Is A RRSP?

A Registered Retirement Savings Plan, or RRSP, is a tax-sheltered investment account that is registered with the Canadian government. It is is subject to deposit limits and conditions on withdrawals. Canadians with earned income who are between the ages of 18 and 71 can contribute to both personal and spousal RRSPs, and there are currently no limits on the number of RRSP’s an individual can hold.

Money that is deposited to an RRSP is immediately deducted from earned income, serving to reduce the income tax payable in the year the deposit is made. The Canadian government established RRSPs as a way to encourage Canadians to save money for retirement.

Funds deposited to an RRSP are treated as taxable income upon withdrawal.

Types of RRSPs

RRSP’s are available as individual, self-directed, group and spousal accounts through any registered Canadian financial institution such as a bank, credit union, trust company or investment brokerage.

A wide variety of investments can be held within an RRSP account including simple bank accounts, term deposits and guaranteed investment certificates. Stocks, bonds, mutual funds and mortgages can also be included in a RRSP. There are now no government regulations that restrict the amount of foreign investment that is permitted within a Canadian RRSP.

RRSP Limits

The amount of money that can be contributed to an RRSP varies between individual taxpayers and is adjusted annually by the Canadian Revenue Agency. Each year, the Canadian federal budget sets RRSP contribution rates which vary based on earned income, pension adjustment amounts and any unused contribution room from previous years. There are no minimums set by the federal government on RRSP contributions and the maximums are expressed as a percentage of earned income up to a fixed amount.

Ways To Use RRSP Funds

Along with providing a source of funds for use during retirement, RRSP’s can be used to fund both the purchase of a home and higher education costs.

The Home Buyers’ Plan (HBP) lets first-time Canadian homebuyers borrow up to $25,000 tax-free from an RRSP to use towards the purchase of a principal residence in Canada. The money withdrawn must be repaid to the RRSP over a period of 15 years, otherwise the full amount will be subject to income tax.

Along with the HBP, the Canadian Revenue Agency permits individual RRSP holders to withdraw funds from their RRSP to pay for education for either themselves or their legal spouse. Known as the Lifelong Learning Plan (LLP) this program is similar to the HBP in that participants must repay the amount borrowed from their RRSP within 10 years in order to avoid paying income tax on the withdrawal.