Registered Retirement Savings Plan (RRSP)

RRSPs encourage Canadians to save for retirement. Contributions reduce taxable income in the year they are made or a later year, up to a contribution limit based mainly on the previous year’s earned income. Unused contribution room can be carried forward.

Investments inside an RRSP, such as funds, shares, bonds and deposits, grow without tax until money is withdrawn. Withdrawals are taxed as income, ideally in retirement, when the person may be in a lower tax bracket.

For example, someone in a 30% tax bracket who contributes 10,000 to an RRSP could reduce their tax bill by about 3,000 that year.

By the end of the year in which the holder turns 71, the RRSP must be closed, usually by converting it into a Registered Retirement Income Fund, which pays income with minimum annual withdrawals, or by buying an annuity. Special programmes allow withdrawals to buy a first home or fund education, to be repaid later. RRSPs are often compared with Tax-Free Savings Accounts; which suits a person better depends largely on their current and expected future tax rates.