RRSP FAQs

Registered Retirement Savings Plans (RRSPs) are a great way to save for retirement. If you already have an RRSP, you understand the basics about this retirement savings vehicle, but you may have other questions. In the tips below, expert Chartered Accountants answer some frequently asked questions about RRSPs.

1.    How much do I need in my RRSP to retire?

“How much money you need to have in your RRSP depends on the answers to many questions,” says Chartered Accountant Bruce Barran, a Partner with Davis Martindale LLP in London. “For example, do you have a company pension or other investments outside your RRSP? How much do you need to live on? Some people can live comfortably on $30,000 a year and others can’t live comfortably on $100,000.” While there is no magic number for the size of your RRSP, consider your savings goal in the context of your overall retirement plan. “If you have a pension or other investments, you may not need to rely as much on an RRSP,” explains Barran. “How much you will need to retire also depends on your desired lifestyle and when you decide to retire.”

2.    What fees are associated with RRSPs?

 “There are fees for some types of RRSPs and none for others,” says Chartered Accountant Bruce Barran, a Partner with Davis Martindale LLP in London. “If you walk into a bank and open an RRSP with a GIC, there is no fee. However, if you opt for a Self-directed RRSP, or some other types of investments or packages there can be a fee.” Before choosing your RRSP, determine what, if any, fees are charged to set it up and to manage any transactions, such as buying or selling stocks. “Fees are costs that erode your investment return,” says Barran. “It is good to keep costs down if you can.”

3.    How long can I pay into my RRSP?

“At the end of the year in which you reach age 71, your RRSP will mature and the funds in your plan must be removed,” says Chartered Accountant Stephen Meek, a partner with BDO Canada LLP in Markham. “If you still have unused RRSP contribution room, or will continue to generate earned income, you can make RRSP contributions to a spousal RRSP after the year in which you turn 71. However, your spouse must be under age 72 for this to be possible; otherwise, his or her RRSP will have matured as well.”

When your RRSP matures, it must be collapsed. “Any amounts withdrawn will be fully taxable to you in the year of withdrawal,” explains Meek. “Your RRSP issuer will withhold tax on your withdrawal. The withholding tax rate varies with the size of the withdrawal.”

You can also purchase an annuity or Registered Retirement Income Fund (RRIF) with your matured RRSP funds. “Generally you would do this when you want to receive retirement income in the future from your old RRSP funds,” says Meek. “Withdrawals from an annuity or RRIF would be taxable only when received by you.”

4.    Who should use spousal RRSPs?

If you have available RRSP contribution room, you can contribute to an RRSP for your spouse. For 2001 and subsequent taxation years, a spouse includes a same-sex partner.

“Your contribution to a spousal RRSP will qualify as a tax deduction for you as long as your total contributions to your plan and the spousal plan do not exceed your contribution limit for the year,” says Chartered Accountant Stephen Meek, a partner with BDO Canada LLP in Markham. “The main benefit of the spousal RRSP is that it allows income-splitting in the future, at retirement, since withdrawals will usually be taxable in the hands of your spouse.”

When deciding whether to contribute to your own or to a spousal RRSP, try to estimate both your and your spouse’s income from all sources in retirement. “Your goal should be to equalize these incomes at that time,” explains Meek. “By doing so, you will achieve income-splitting, which will help to minimize your taxes in your retirement years.”

Pension income-splitting rules permit splitting eligible pension income with your spouse. “This may result in a reduction in the total tax payable by your spouse and you,” says Meek. “However, if both spouses have an RRSP in retirement, you will have more flexibility when splitting income.”

5.    When should I take money out of my RRSP?

“As its name says, an RRSP is for retirement, so the money inside it should not be taken out until then,” says Chartered Accountant Jean-Paul Lafrance, a tax partner with BDO Canada LLP in Ottawa. However, there are some exceptions. “If you are buying your first home, you can take out up to $25,000 for the down payment,” says Lafrance. “You might also want to take money out of your RRSP in a year in which your income is very low.”

If you are going back to school for full-time studies, you can borrow $10,000 a year for two years from your RRSP. “However, you usually must pay it back within 10 years, according to prescribed rules,” says Lafrance.

6.    What kinds of investments should be in my RRSP?

“Many types of investments can be in your RRSP, including savings accounts, mutual funds, Guaranteed Income Certificates (GICs), stocks and bonds,” says Chartered Accountant Jean-Paul Lafrance, a tax partner with BDO Canada LLP in Ottawa. 

If you have a choice between placing investments inside or outside your RRSP, put the ones that generate interest inside your RRSP. “Doing this keeps the interest income inside the RRSP,” explains Lafrance. “If you have other investments, such as stocks, that produce dividends or capital gains, put them outside your RRSP because the tax rate on capital gains and dividends is lower.”

7.    Can I use my RRSP to finance a house purchase?

“If you plan to take advantage of the RRSP Home Buyers’ Plan, there are some important details to consider,” says Chartered Accountant Glenn Lott, Partner at Lott & Company, Chartered Accountants in Markham. “When buying your first home, you can withdraw up to $25,000 from your RRSP. But you’ll need to have the $25,000 in your RRSP for at least 90 days before making that withdrawal. So, be sure to make any additional contributions to your RRSP at least 90 days prior to making your Home Buyers’ Plan withdrawal.”

Once you have made your Home Buyers’ Plan withdrawal, you must buy or build your qualifying home by September 30 of the year following the year of the withdrawal. When buying a home, you are considered to have met the deadline if you have a written agreement in effect on October 1 of the year following the year of withdrawal and you take possession of the home by September 30 of the second year following the year of the withdrawal.  

If you are building the home, you are considered to have met the deadline if you have paid an amount to the contractors or suppliers after the date of the first withdrawal and before October 1 of the following year for materials or construction costs, that was at least much as the amount of your withdrawals. It is important to note that the contractors or suppliers must not be related to you.

“Consider skipping a repayment of the Home Buyers’ Plan withdrawals if you have a low-income year, for example, if you’re on maternity leave or collecting employment insurance,” says Lott. If the required Home Buyers’ Plan repayment is not made, the amount of the required repayment must be included as part of your income in that year. “This additional income will be subject to a low tax rate or possibly no tax at all if your total income is below the taxable threshold,” adds Lott. “The cash designated for the Home Buyers’ Plan repayment can be saved and contributed to a Tax Free Savings Account, where it will earn tax-free income. When your income level rises and you are in a higher tax bracket, the money can be withdrawn from the Tax Free Savings Account and contributed to your RRSP, resulting in a tax saving.”

Alternatively, if your spouse is in a higher tax bracket in the year that the repayment is skipped, have your spouse use this money to make an additional RRSP contribution. “The amount could be set aside as a deductible contribution as long as there is available contribution room,” advises Lott. “The tax savings on the spouse’s contribution will exceed the income tax paid on the Home Buyers’ Plan income.”

8.    RRSPs and your benefits package

When you begin a new job, retirement may be the last thing on your mind. However, it can be beneficial to negotiate an RRSP contribution as part of your new remuneration package.

“Even if your new employer does not offer an RRSP-matching program, having your employer direct your RRSP contribution to your financial institution will help your cash flow,” advises Chartered Accountant Jim Lockhart, Tax Partner, BDO Canada LLP in Kenora.

This is because contributions made directly by the employer are not subject to income tax withholding. “Let’s assume that you intend to make an RRSP contribution of $5,000,” explains Lockhart. “Because your employer is obligated to remit source deductions on your earnings, if you are in a 46 per cent tax bracket you would have to earn approximately $9,260 in order to have $5,000 left to make the RRSP contribution. By having your employer make the contribution directly, your cash flow is increased as you are, in effect, receiving the tax savings up front. This extra cash flow could be used to further increase your RRSP contributions.”

9.    How can I protect the value of my RRSP?

“There are three considerations when it comes to protecting the value of the investments in your RRSP and providing for your retirement,” says Chartered Accountant Ted Cossitt of Grimsby. “The first is safety, the second is income and the third is growth or capital gains.”

If you keep your funds in cash or GICs, the funds are secure, but the income and growth is currently minimal. “If you want higher income and growth, there will be some risk that may lead to capital losses,” cautions Cossitt. “Depending on your investment knowledge and skill, you may want to engage an investment advisor to assist in the investing of the funds within the RRSP, and eventually the Registered Retirement Income Fund (RRIF). Typically, the closer one is to retirement, the higher the portion of funds that are placed in more secure investments.”

10. How does belonging to a pension plan affect my RRSP contribution limit?

“When you belong to a pension plan, your contributions to that plan, plus the value of any contributions of your employer—which is the pension adjustment in Box 52 on your T4—are deducted from your RRSP deduction limit,” says Chartered Accountant Ted Cossitt of Grimsby. “This will reduce or eliminate the amount that you can contribute to an RRSP. This will be calculated annually and appears on your Notice of Assessment from the Canada Revenue Agency (CRA).” You can also obtain your RRSP contribution room by accessing the CRA’s website.

Brought to you by The Institute of Chartered Accountants of Ontario

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