What is an RRSP?

A registered retirement savings plan (RRSP), or retirement savings plan (RSP), is a Canadian pensions savings account used for holding savings and investment assets in a tax advantageous manner. They were introduced in 1957 to help promote retirement savings for Canadians.

Contributions to RRSPs are deductible from total income, reducing income tax payable for the year in which the contributions are claimed. Within the RRSP no tax is payable (including interest, dividends, capital gains, foreign exchange gains, mortality credits, etc.). Generally withdrawals are taxed as income when they are withdrawn.

RRSP accounts can be set up with either one or two associated individuals:

• Individual RRSP: Within Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
• Spousal RRSP: a spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse's name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.

Contributions are usually deducted from taxable income in the same tax year as they were made. Taxes for the individual are reduced at the individual's highest marginal rate.

RRSP’s have contribution limits that are calculated at 18% of the prior year's reported earned income (from employment or self-employment), generally with a maximum. If the RRSP limit is unused, this can be carried forward to future years.

RRSP contributions within the first 60 days of the tax year may also be used as a deduction for the previous tax year.

Withdrawals from an RRSP can be made at any age. Amounts withdrawn will be included in a persons taxable income for that year and “withholding Taxes” are taken at source from any withdrawal to reduce the taxes owing at the end of the year.The two exceptions to these rules are withdrawal for the Home Buyer's Plan and the Lifelong Learning Plan.

Before the end of the year a person turns 71, the RRSP must be transferred to a RRIF, an annuity, or fully cashed out.

Any assets held with a RRIF will continue to grow tax-free indefinitely, however a minimum RRIF withdrawal amount must be received by the account holder each year.

On death within an RRSP, where the spouse is the named beneficiary, the RRSP continues, without triggering taxes, in the name of the spouse.