RRSP Deadline and Contribution Limit

Before we start, as quick reminder, the RRSP contribution deadline for 2023 is March 1, 2023. Read on!

There are a lot of RRSP questions going around, especially during RRSP season. This is why we have this comprehensive post so you can find everything you need to know about the RRSP in one spot!

• What is an RRSP and how does it work?
• What is the RRSP contribution deadline and limit?
• When does investing inside the RRSP make the most sense?
• What about transferring your RRSP assets to your TFSA, preparing for retirement?
• Or our favourite, clarity around the epic battle of RRSPs vs TFSAs?

RRSP Deadline and Contribution Limit 2023, and Everything in Between!

Regardless of whether you prioritize your RRSP over your mortgage, or if you invest in your RRSP before your TFSA – the facts are – saving and investing inside your Registered Retirement Savings Plan (RRSP) remains one of the best ways to fund your retirement.

We’ve got you covered with everything you need to know about the RRSP.

Beyond the RRSP Deadline – the RRSP – a wealth-building tool for generations

Straight up, we believe investing inside your Registered Retirement Savings Plan (RRSP) remains one of the wealth-building wonders of our Canadian world.

The account structure was established way back in 1957 as a means to help (and encourage) Canadians to save for their retirement. The main benefit of this account is the tax-deferral benefit – but there are far more benefits to this account than that if you want to use it wisely.

What do we mean by tax-deferral? It’s not tax-free?

Heck no. That’s the TFSA that you can read more about here. 

When we say tax-deferred we mean any money you contribute to your RRSP will be exempt from Canada Revenue Agency (CRA) taxes in the tax year you make the deposit. You will only be taxed years down the road (ideally) when you withdraw funds out of the account. Simply put, RRSPs are an amazing way to reduce your current-year tax bill.

Here is a quick example:

• Say you make $80,000 per year. You decide you want to put the maximum allowable amount this year as your RRSP contribution limit – that would be 18% of your earned income, meaning $14,400.

The beauty of your RRSP contribution is that come tax time, the CRA will treat your earned income as $65,600 ($80,000 – $14,400) because of your RRSP contribution. 

What is my RRSP Contribution Limit?

Like most personal finance answers: it depends!

Essentially, anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. 

You can contribute the lower of:

• 18% of your earned income in the previous year (see above in our example), or
• to the maximum contribution amount for the tax year.

CRA sets the upper contribution limits for each tax year. 

You can find that information here and we’ll keep this link updated for you so you don’t have to search for it!

https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

On top of the RRSP deadline (see above), there is also an RRSP contribution limit to consider as referenced above. 

Again, the RRSP contribution limit is 18% of the total income you earned in the previous year, up to a specific limit set by the CRA – whichever is the lower of the two options.

The RRSP deduction limit for the 2022 tax year is $29,210.

Based on that CRA link, you’ll see RRSP contribution room moves up annually. You already know that contributions to an RRSP reduce the amount of income tax individuals must pay each year, so the Canada Revenue Agency (CRA) sets an annual limit on the number of contributions each eligible taxpayer can make to RRSPs to avoid excess contributions. 

The deduction limit of course refers to this year’s limit rather than taking into account any unused contributions from previous years. 

When is the RRSP Contribution Deadline?

The RRSP deadline is 60 days into the new year. 

What if I have a pension? Will my RRSP contribution limit/room be reduced?

The short answer is: yes.

Your RRSP contribution limit/room will be reduced if you participate in a pension plan or deferred profit-sharing plan.

The government does this to ensure there is largely an equal opportunity for tax-sheltered/tax-deferred retirement savings with or without any pension plan participation. 

So, if you have a defined benefit (DB) pension plan, a defined contribution (DC) pension plan or a deferred profit-sharing plan (DPSP), you won’t be able to contribute as much to your RRSP. It’s just that simple.

The reduction in your RRSP contribution room is known as a pension adjustment. What happens is:

• Under a DB plan, your adjustment is an approximate value of the pension benefit you earned in the previous year.
• Under a DC or DPSP, your adjustment is the amount that you and your employer contributed to your plan account in the previous year.

Again, it’s all to level the playing field – how much Canadians can contribute to this tax-deferred plan.

I’ve heard about “buying RRSPs” each spring – is that something I should do?

Well, let’s be clear. 

The RRSP is an acronym for the Registered Retirement Savings Plan. This is an account, this is not an investment by itself. So, you can’t “buy RRSPs”.

Please (kindly) correct your friends at the next dinner party when they say this!

That said, lots of articles do come out each winter or early spring about contributions to your RRSPs. We believe it is something you should at least consider. The next sections will explain why.

Are the critics correct? 

In some cases, the critics of the RRSP are correct. While you get the tax deferral benefits by making contributions to your RRSP, you have to eventually pay tax on monies on the way out of the account. 

So, RRSP contributions make great sense in most cases but not always.

Let’s walk through those cases below!

RRSPs can make sense when you’re in your peak earning years

Based on our own experiences, we believe the ideal scenario is to contribute to RRSPs when you are in a good-paying job, in a high marginal tax rate, and/or your peak earning years. 

This means you are maximizing the tax-deferred power of this account and your investments within it: you are contributing money in your highest-earning years, with the future potential to withdraw money from the account in lower-income years.

Conversely, the worse situation is to contribute to your RRSP in a low marginal tax rate only to withdraw funds in higher income years. This wouldn’t be very smart tax planning.

Where can I open an RRSP?

You can choose to open an RRSP with a bank or credit union, which can be a good option for those who want the option of speaking with someone face-to-face.

In addition, many financial institutions, including some of our favourite discount brokerages offer RRSP accounts that are easy and simple to open, online, from anywhere!

We love self-directed RRSP accounts ourselves. 

Those RRSP accounts, in particular, allow you to set up and manage your own RRSP account in minutes online, from the comfort of your couch. 

Get your social insurance number (SIN) handy and other identification, and you should be good to open an account.

What types of investments can I hold within my RRSP?

Thankfully lots!

Similar to the assets you can hold within a Tax-Free Savings Account, Canadians can own a number of different investments inside their Registered Retirement Savings Plan (RRSP):

• Cash
• Guaranteed Investment Certificates (GICs)
• Bond funds or bond ETFs
• Individual stocks
• Equity funds or equity ETFs

At Cashflows & Portfolios, we own a mix of Canadian and U.S. stocks, along with low-cost, diversified ETFs.

Are there different types of RRSPs?

Yes. 

The most common type of RRSP is an individual plan that you open for yourself. 

If you are married or have a common-law partner, you can also open a spousal RRSP. 

Another option is a group RRSP if your employer offers this.

1. Individual RRSP – this is an account in your name. The investments held in the RRSP and the tax advantages associated with them belong to you.

Many financial institutions offer self-directed RRSPs. We believe those are the best. In those accounts, as the name implies, you can self-direct your account by owning a broader range of assets: cash, GICs, mutual funds, bonds, stocks, ETFs, and more.

2. Spousal RRSP – a spousal RRSP is registered in the name of your spouse or common-law partner. They own the investments in the RRSP, but you contribute to it. You get the tax deduction from any of the RRSP contributions you make to a spousal RRSP. Any contributions you make reduce your own RRSP deduction limit for the year. They won’t affect how much your spouse can contribute to their own RRSP.

We believe spousal RRSPs are great for future retirement income splitting. Meaning, the combined income tax you pay as a couple may be lower than what you would pay if all your savings were in a single RRSP. 

Spousal RRSPs can make great sense when one partner earns significantly more money than the other AND that spouse is likely to be in a higher tax bracket when both of you decide to retire. 

To qualify for a spousal RRSP, you must:

• have lived together as a couple for at least 12 months,
• have a child together by birth or adoption, or
• share custody and support of your partner’s children from a previous relationship.

Now, some things you need to know!

If your spouse takes out money you have contributed:

• within 3 years of your contribution date – you will  have to pay tax on the withdrawal amount
• 3 years after your contribution date – your spouse will pay tax on the withdrawal amount.

The key point you need to remember is spousal RRSPs are designed to help equalize future retirement income needs, so really only consider one when one spouse has a much higher income for a prolonged period of time, than the other. 

3. Group RRSP – if your employer offers this, count yourself lucky!  Some employers offer group RRSPs as a benefit to help employees save for retirement. 

The way these typically work is when the collection of RRSP accounts, of all employees, are managed by one financial institution.

So:

• Your plan contributions are usually automatically deducted from your pay. Your employer may match or add to your contributions. Take the free employer money if you can!!
• Your employer usually pays the costs of opening and managing the plan. You pay any investment costs.
• The range of investment options is usually limited, depending on where the group RRSP is held, based on what that financial institution may offer.
• The rules for when and how much money you can take out of the plan vary depending on your employer.

We can speak to the structure of all employer Group RRSP plans, but it’s certainly worth asking your employer if they have one and how the management of that plan works.

Should I contribute to my TFSA or my RRSP?

Ever since the federal government introduced the Tax-Free Savings Account (TFSA) in 2009, there’s been a debate: should Canadians invest inside their TFSA or their RRSP?

We say ideally both!

Why?

Both accounts provide tax advantages — there’s no tax payable on investment growth on funds held inside either account. However, you already know each account has certain rules.

Whether contributing to an RRSP or a TFSA, the main things to consider are when and how you want to use the funds.

Let’s quickly compare account structures first.

When it comes to saving for retirement, while RRSPs are pretty hard to beat thanks to a reduction in your annual income tax paid, we believe if you’re already in a lower marginal income tax bracket (say making $50,000 per year or less), making contributions to your TFSA may make more sense.

Also, based on how TFSAs were designed to supplement RRSPs because any TFSA withdrawals are not subject to tax, they are also a great option to save for shorter-term goals such as the down payment on a home, saving up for a major vacation or keeping an emergency fund.

Although we have preferred to use the TFSA for investing purposes, it’s not just a savings account as the name suggests, we believe TFSAs offer more flexibility than RRSPs.

Simply put: If you have adequate income and savings, it’s usually advisable to contribute to both an RRSP and a TFSA. 

If you really just had to pick just one, assuming you could not max out your TFSA first, we would suggest you consider maxing out your TFSA before your RRSP.

The reality is, if your savings rate is modest to high, you can likely maximize contributions to your TFSA first and then contribute/maximize contributions to your RRSP with any funds leftover. 

Can I take money out of the RRSP, and put it back in?

You can absolutely take money from the RRSP before retirement, but we don’t personally advise it.

The RRSP was designed as a retirement account – saving for your retirement. 

Withdrawals from your RRSP may only be redeposited if you have sufficient additional contribution room and in certain circumstances. We’ll discuss RRSP withdrawals and some of those circumstances in more detail below. 

Should I invest inside my RRSP or pay down my mortgage?

Both!

Again, that’s ideal, but we know there are only so many funds to go around.

We see many pros in paying off the mortgage first. 

1. Save interest costs – certainly, the higher the borrowing costs, the greater your potential savings will be the faster you pay down this debt. 
2. A guaranteed rate of return – the savings in mortgage interest costs will likely be greater than what I would earn in some lower-risk investments/general savings.
3. Debt freedom – another reason to pay off your mortgage debt before investing, is it will provide you with some financial flexibility.  Monies formerly funnelled to paying someone else first (i.e., the bank) will now go to you. It’s also hard to put a price tag on financial debt freedom!

With all the emotional and financial benefits that paying off your mortgage can bring, it may make better sense to invest!

Here are some thoughts about investing (inside your RRSP) instead of aggressively paying down your mortgage.

1. When borrowing costs are cheap – unless you’ve been living under a rock for the last decade, you’ll know that mortgage costs (borrowing costs in general) are historically-speaking cheap. So, use that to your advantage and use any savings for investment purposes for the reasons below. 
2. Long-term investments should outperform low-interest rate mortgage payments – by maintaining your minimum mortgage payments, and putting your extra funds into long-term equity investments, chances are you will come out ahead with investing.  Although past performance is never a perfect indicator of any future results, a diversified mix of investments over a 20-25 year investment time horizon (approximately the same period as your mortgage amortization) should deliver close to an 8% return. This would be by far and away more money earned than any amount you’d save in interest charges by paying off the mortgage early – all things being equal.
3. Diversification – while owning real estate and your home, or multiple properties for that matter might be fine and good, we believe all investors may benefit long-term from diversification. Diversification, in a nutshell, can bring higher potential returns for less investment risk. Said another way, consider diversification like a healthy diet. While eating a variety of healthy, diverse foods over time won’t guarantee your body will be healthy, doing so will increase the probability you will be healthier all things being equal. So, having an investment portfolio that extends beyond real estate, will allow you to participate in growth opportunities that are not tied to just real estate.

4. Liquidity – have you ever tried to sell a home in a few days, move out, AND move into a new home? I wouldn’t bet on doing that successfully. By having your assets invested beyond your primary residence, you will have more liquidity should you need the money for something.
5. Tax advantages and currency advantages – investing inside your RRSP doesn’t have to include U.S. or international investments, maybe it could, to take advantage of various currencies from around the world.  

Given very low, prolonged interest rates, we believe while being debt-free is great it’s more important to have debt management – and strive to optimize any savings for investment purposes.

You’ll read much more on our site overtime on this subject. 

If I invest inside my RRSP, should I spend the RRSP-generated tax refund?

No. Please don’t do that!

Remember making an RRSP contribution is a method to reduce your taxes owning/taxes payable. 

RRSP contributions offer two great benefits:

1. you can reduce taxes payable today, and
2. you can participate in long-term tax-deferred growth as long as investments stay inside this account.

But it’s also critical to reinvest the RRSP-generated refund from any RRSP contribution made.

This is because the RRSP-generated refund is really a temporary government loan.

Let’s look at an example. Consider working in the 40% tax bracket:

• If you put $300 per month into the RRSP for the year, that’s a nice $3,600 RRSP contribution.
• You’ll get a $1,440 refund (40% of $3,600).

When your $1,440 cheque arrives, you decide to spend it on tickets to Cuba to escape our long, cold-Canadian winter. That sounds like fun!

Just know when you do this, this $1,440 refund is effectively borrowed government money – a long-term loan from the government they are going to come back for, in whole or in part (more on that in a bit) when you withdraw money from your RRSP. 

So, if you always spend your refund you are undermining the effectiveness of RRSPs because you are giving up your loan to drive tax-deferred growth.  A refund associated with your RRSP contribution should not be considered a financial windfall but the present value of future tax payment you must make.

To really harness the power of your diligent RRSP contributions, we suggest you make some decisions about what you’re going to do with the RRSP refund first – ensuring you put the money to work.  Consider the following as a few options:

• Reinvest it back into your RRSP (great bang for your buck) and what we have always tried to do!
• Pay down your mortgage (a guaranteed rate of return on debt + interest).
• Contribute your RRSP-generated refund to fund your TFSA contribution.

In our example, if you typically spend your RRSP-generated tax refund as a “gift” then we think you’re better off prioritizing your TFSA over your RRSP because of the known benefits of that present-day contribution.  

Can I invest in both my TFSA and RRSP at the same time during the year? 

Absolutely!

We think that’s a great idea!

As you know from our comprehensive Tax-Free Savings Account (TFSA) post, the government has eliminated the guesswork about how much the tax payback will be – it’s tax-free!

Because you don’t get any tax break on your TFSA contribution, the government does not charge you tax when money comes out of that account.

The RRSP is not the same. Because you do get a tax break when you make an RRSP contribution, the government eventually wants their money back.

Personally, neither of us have any idea what our tax rates may be in full-on retirement. 

So, if you know for sure your tax rate will be significantly lower in retirement than today, RRSP contributions are a wise thing to do.  If not, making the TFSA a higher priority might be a better choice.  

Here is a good comparison table to consider your decision when it comes to retirement planning:

Again, if you can contribute to both accounts – do it!

At Cashflows & Portfolios, we strive to contribute the maximum dollars available to our RRSPs (and our TFSAs), every year.

We avoid RRSP withdrawals as much as possible. 

What are some key reasons to flat-out avoid RRSP contributions?

Here is what we think, your mileage may vary!

1. If your income is too low – our general rule of thumb is if your earned income is below $50,000 per year – then any RRSP contribution may not make too much sense. 
2. If you will be in a higher tax bracket in retirement than when you are working – RRSPs don’t make too much sense – especially when compared to other accounts to invest in. 
3. If you feel, for whatever reason, your pension(s) from work, your future government benefits such as Canada Pension Plan (CPP) or Old Age Security (OAS) or other income streams will be more than plenty to fund your retirement. It’s rare, but if you already have lots of financial success then it may not make sense to contribute to your RRSP.

Should I invest in my taxable account before my RRSP?

Generally speaking, no, at least that’s our view. 

As investors, we have always strived to max out contributions to our registered accounts (such as our TFSAs, RRSPs) before taxable investing. 

That said, there could a number of reasons why you might consider using the RRSP over taxable investing. Some of those relate to your behaviour and other factors. 

1. If you’re an active investor. We believe it might make sense to avoid taxable investing. Outside the RRSP, every time you make a trade, you create a potential tax disposition. Maybe the RRSP is better although be very mindful of your trading fees whenever you trade. Those fees can add up!
2. If your investing time horizon is short. Generally speaking, RRSPs are best for wealth-building which means you have decades of time to leverage the power of tax-deferred growth. If you only have a few years before retirement, and you haven’t leveraged the use of the RRSP yet, it might not make sense for you.
3. If you feel you have “enough” already. Like we mentioned above, if you feel, for whatever reason, your pension(s) from work, your future government benefits such as Canada Pension Plan (CPP) or Old Age Security (OAS) or other income streams (such as the sale of a corporation) are more than enough, then using the RRSP for more wealth-building purposes may not be needed. The ideal situation is to always withdraw RRSP monies in a lower tax bracket than your RRSP contributions.

Believe it or not, you can have too much money in your RRSPs but we believe those instances will be very rare. Remember, personal finance is personal and your personal situation could be very different than any else’s. Do what’s best for your financial path – always.

What happens if I withdraw money from my RRSP early before retirement?

You can do that, but we don’t think that’s a great idea!

Here’s why:

1. RRSP withdrawals lose tax-sheltered compounding power

When you withdraw funds from your RRSP, you lose one of the main benefits with it: the tax-deferred compounding power.

The investments you have growing in your RRSP are tax-deferred until the time of withdrawal. This means you won’t be taxed on the money growing in an RRSP until you withdraw it. And, because of the effects of compounding (money that makes money, can make more money if left alone…), the withdrawal of even a relatively small amount can have a substantial impact on the long-term value of your savings.

2. RRSP withdrawals are taxable!

Any withdrawals from your RRSP are immediately subject to withholding tax.

• If you withdraw up to $5,000, the withholding tax rate is 10%.
• If you withdraw between $5,001 and $15,000, the withholding tax rate is 20%.
• If you withdraw more than $15,000, the withholding tax rate rises to 30%.

Note that these tax rates apply to everywhere in Canada except Quebec. In Quebec, provincial tax rates apply on top of the federal withholding tax.

But the taxes don’t end there. The amount of the withdrawal is also included in your taxable income for the year. So if your marginal tax rate is higher than the withholding tax rate, you’ll have to pay additional tax at year-end on the funds you’ve withdrawn.

And….if that wasn’t enough, you already know above that withdrawals from a spousal RRSP can carry additional risks as well. 

3. Permanent loss of RRSP contribution room

Once you make that RRSP withdrawal, not only are you losing your tax-deferred power, and paying taxes on your withdrawals, you are losing the RRSP contribution room you originally used to make your deposit.

Sure, you can continue making your maximum RRSP contribution in future years, but you cannot re-contribution money you withdrew. 

Therefore, any RRSP withdrawals prior to retirement have the potential to severely damage the value of your RRSP at the time of retirement.

Can I withdraw from my RRSP without early withdrawal penalties? 

As previously mentioned, you can absolutely take money out of the RRSP early, but we don’t personally advise it.

The RRSP was designed as a retirement account – saving for your retirement. 

You can, however, withdraw from your RRSP without a tax penalty in certain circumstances.

• The Home Buyers’ Plan (HBP) lets you and your spouse borrow up to $35,000 from each of your RRSPs to build or buy a home. This applies to withdrawals made after March 19, 2019. You can do this as long as you or your spouse have not owned a home in the past 5 years. You must also repay the amounts borrowed to your RRSP within 15 years. 
• The Lifelong Learning Plan (LLP) lets you withdraw up to $10,000 per year for a 4-year period from your RRSP (to a maximum of $20,000). You can use this money to pay for the education of you or your spouse or your common-law partner (not your child). You must also repay the full amount within 10 years.

Funds withdrawn under the HBP and LLP are not taxable, as long as you repay them on time. 

You won’t lose contribution room with these withdrawals. 

But, making these RRSP withdrawals you will lose out on many years of tax-deferred investing and growth while you pay back the RRSP loan.

Should I withdraw from my RRSP in a financial emergency?

Yes, you certainly can but try to avoid that unless absolutely necessary.

If a financial emergency arises and you need cash, we believe there are better alternatives if you have them.

1. Draw from your emergency fund or cash savings
2. Take money out of your TFSA
3. Use a line of credit – as long as you have the plan in place to pay it back, quickly, to avoid major interest costs.

For the most part, we believe having an emergency fund is best and using that account to cover any short-term expenses including those for emergencies.

Don’t have an emergency fund yet?

Start by re-evaluating your cashflow. 

Consider what expenses are essential and what you value for where your money goes. 

Cashflow management is key to financial wealth-building. 

Can I make RRSP withdrawals and move that money to my TFSA?

You bet.

In fact, lots of retirees do this every year to move their tax-deferred money to their tax-free money!

This allows these retirees to be far more flexible with their portfolios since they are removing the tax liabilities that are the RRSP withdrawals.

Where can I find out how much RRSP contribution room/limit I have?

You can confirm your RRSP contribution limit by contacting the Canada Revenue Agency (CRA). You can find it online if you are registered for CRA’s “My Account” services. 

For more information, search “Where can I find my RRSP contribution room information?” at canada.ca

or…click the link again below:

https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html

We also suggest you keep track of your RRSP contributions – this way, if there is an issue or a discrepancy, you can discuss it with CRA or your financial institution. 

What happens if I go over my RRSP contribution limit?

The penalty for RRSP over-contribution is 1% per month for each month you are over the limit. 

CRA does allow a $2,000 grace amount for over-contributions. However, that amount is not tax-deductible. 

The only way to remedy an RRSP contribution overpayment immediately is to withdraw the amount. However, that amount will be subject to taxation.

Discuss this over-contribution with CRA, we believe you might be able to use a form called T3012A.

If you don’t file the T3012A, the tax withheld at the source can be claimed as tax paid on your tax return.

If an over-contribution is not withdrawn on a timely basis, the penalty above may arise and you will be taxed eventually on the over-contribution as an RRSP withdrawal, for which no deduction was allowed.

If the over-contribution is later in the year and you are sure you will have enough contribution room to cover the amount next January, it may make more sense to keep the overpayment and pay the penalty until the contribution room opens up again.

To pay the penalty you must file a T1-OVP tax return to calculate the amount within 90 days after the calendar year.

The bottom line is, try to avoid making RRSP over-contribution! It’s messy!

Do investment gains in my RRSP affect my contribution limit?

Nope!

Like the TFSA, investment income and changes in the value of your investments inside the account do not affect contribution room. This means, depending on the investment performance inside your RRSP, you have the potential to build significant wealth.

How long can I keep my RRSP “open’?

A long time!

You must however convert your RRSP to an RRIF (Registered Retirement Income Fund) by December 31 in the year you turn age 71.

Now, you don’t HAVE to convert your RRSP to an RRIF but we do think it’s one of the best options out there.

How do I convert my RRSP to an RRIF?

Here is a quick primer:

1. Choose your financial institution or keep your existing one – that can move your money easily into the account(s) you need. Most people use the same financial institution that holds their RRSP assets, although that’s not required. If you have multiple RRSPs, you might wish to consolidate them.
2. Complete the RRIF application – the application will ask you about your beneficiary and other details, including your RRIF withdrawal schedule: monthly, quarterly, semi-annually, or annually. 

We’ll have much more to say on RRIFs in a future dedicated section of the site so stay tuned!

You can always set up just a portion of your RRSP, as an RRIF before age 71, but you will be forced to set up your entire RRSP account as an RRIF in the year you turn age 71. Something to keep in mind!

As an alternative to an RRIF, you can always withdraw RRSP funds as cash (and get taxed – see withholding taxes as well) or turn your RRSP assets into an annuity.

Updated: Thanks to our reader, Bob, we have linked to our comprehensive posts on RRIFs here:

What is a RRIF? How does that account work?

What is a RRIF? How Does a RRIF Work?

Can I have more than one RRSP?

Yes, for sure, but you don’t get more contribution room by having more accounts. 

The total amount you can contribute to is fixed and subject to rules. 

We suggest keeping things simple, owning one RRSP (or one Group RRSP with your employer beyond your personal RRSP or spousal RRSP) is enough to keep track of. 

Can I open a joint RRSP with my spouse?

No, see our outline on the types of RRSP accounts above. 

Can I make a contribution to someone else’s RRSP?

No, you can’t contribute directly to someone else’s RRSP.

You can, however, gift money to others and provided they have earned income, they can contribute any money gifted to their account up to their allowable RRSP contribution room.

What happens if I have a capital loss in my RRSP? Can I use that to reduce my taxes?

Unfortunately not. 

In many cases, using a taxable account, you may have heard that some investors sell assets that decrease in value (capital loss) to lower the capital gains of other investments inside a taxable account. That’s an approach to minimize capital gains tax. 

However, you can’t carry this out using an RRSP because you don’t pay tax on any capital gains.

All income and growth earned inside the RRSP are tax-deferred.

Don’t worry, you’ll pay your share of taxes when RRSP monies are withdrawn!

When I die, what happens with my RRSP?

For many Canadians, RRSP assets might be the largest tax liability we own.

The main thing you need to know is, generally speaking, upon death the taxman treats the fair market value of your RRSP as income – subject to tax at your marginal tax rate.  

Current CRA (Canada Revenue Agency) tax rules require that the fair market value of the RRSP, as of the date of death, be included in the deceased’s final tax file submission.

Tax bills on the RRSP can be avoided, however, if you name certain beneficiaries. To make things more complicated (CRA tends to do that…), not all beneficiaries are created equal.  Here are some things to think about, since qualified beneficiaries may be able to receive RRSP funds without anyone paying tax upon your death.

RRSP qualified beneficiaries

1. A spouse or common-law partner

There is a spouse rollover provision that allows a spouse, who is listed as the beneficiary, gets to put the deceased’s RRSP assets into their own RRSP without any immediate tax consequences.  For what it’s worth, this is what my wife and I have established for our RRSPs.  This way, either one of us can use this rolled-over money and maintain tax-deferred growth inside an RRSP account until monies are ultimately withdrawn.

I suppose a spouse or common-law partner can also choose to take the RRSP assets as cash but in that scenario, RRSP proceeds are taxed in either the hands of the surviving spouse in the year of death OR the estate of the deceased will account for the value of the RRSP in the final income tax filing and will need to pay any resulting taxes.

2. A financially dependent child or grandchild

Canadians may wish to consider another option.  An RRSP owner can designate their financially dependent child or grandchild as their RRSP beneficiary.  From there, depending upon the child’s age and nature of the dependency, a host of other options can potentially occur, including:

• Transfer the money to their RRSP (or even an RRIF – Registered Retirement Income Fund).
• Purchase an annuity until age 18 – while no tax is payable immediately at the time of death, annuity payments are 100% taxable to the child.
• Rollover assets into a Registered Disability Savings Plan (RDSP).

Do you have other RRSP beneficiary options?

Yes. 

You can always consider naming a charity as an RRSP beneficiary.  The RRSP account holder can send some or all of their RRSP assets to charities after death.  If that choice is made, the value of the RRSP assets is included in the final income of the deceased and taxes apply.  The benefit (pardon the pun) of this approach is the charitable donation will qualify for a donation tax credit up to 100% of the RRSP assets donated – pretty much negating any taxes due.

The RRSP beneficiary takeaway:

Consider naming a beneficiary other than adult children.  Why?  If no proper beneficiary is named (i.e., you have no spouse and only have non-dependent adult children to name) OR if the estate is listed as the beneficiary, then the RRSP assets will simply be added to the estate or given to non-dependent adult children beneficiaries, included in the deceased’s income as a deemed disposition of the deceased – and the estate will be responsible for paying the taxes owing.  

While simple, letting RRSP assets go to the estate increases the value of the estate and more probate or administration fees will apply to settle it. Adult children should be aware of this and so should the RRSP owner!

Bottom line is that RRSP assets can be transferred directly to the beneficiaries you designate (in the RRSP account documentation) when completing the application. Whatever option investors choose to ensure that choice is directly aligned to wills or an overall estate plan.

(Note: In Quebec, it is generally not possible to name beneficiaries on RRSP or RRIF applications.  This means RRSP and RRIF assets generally flow through to the estate.)

Can I have too much money in my RRSP? Will I be taxed heavily in retirement?

Possibly!

With tax-deferred growth, RRSP investments can grow over time without being taxed as long as the money made stays in the account.

For most Canadians, to reap the benefits of this tax-deferred account, they should consider maximizing their RRSP contributions in their highest income-earning years when they have a plan to withdraw RRSP/RRIF monies when they are in their lowest income-earning years (likely retirement).  This is because when you take money out of the RRSP you will likely have to pay income tax on the money withdrawn.

That said, if RRSP contributions are maxed year-over-year, and money compounds away, then potentially when it comes to the OAS clawback, RRSP contributions could trigger those clawbacks. 

So, if you are concerned about OAS clawbacks you can have too much money in your RRSP!

However, at Cashflows & Portfolios, we believe having an OAS clawback concern to navigate is an excellent problem to have. This is where our services can help. 

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