Your guide to understanding an RRSP brought to you by the Modern Money research team.
What is an RRSP?
An RRSP, short for “Registered Retirement Savings Plan,” is designed to help individuals save for retirement. In a world where pensions are less common, many Canadians take charge of their retirement by utilizing an RRSP.
This tax-advantaged account deducts contributions from your taxable income for the year, offering an attractive feature. The tax on these contributions is deferred until you decide to withdraw the funds. The key advantage is reducing taxable income, leading to substantial savings, especially considering your tax bracket.
How Does this Work?
An RRSP is effortless to open, and numerous financial institutions offer a wide array of options. Search for an institution with low fees, direct-deposit capabilities, and no minimum contributions, giving you the freedom to contribute when ready and on your own terms.
As of 2025, your RRSP deduction limit is 18% of your earned income from the previous year, up to a maximum of $32,490. If you didn’t use all of your contribution room in prior years, those unused amounts carry forward, so your total contribution room could be higher.
Calculate RRSP contribution room by tracking previous contributions and their respective yearly limits. This sounds difficult, doesn’t it? We agree. Well, thankfully there is an easier solution. The CRA keeps track of your contribution limit for you and they report it on your Notice of Assessment each year. You can also log in to your CRA My Account and see your RRSP contribution limit there (further information on the benefits of setting up online access with the CRA here).
There is a buffer of $2,000 for RRSP overcontributions: you can exceed your contribution limit by up to $2,000 without facing a penalty. However, contributions beyond that buffer are subject to a 1% per month penalty on the excess amount. The penalty continues until you withdraw the excess or new contribution room becomes available. To report and pay the penalty, you’ll need to file Form T1-OVP.
Benefits of an RRSP
As mentioned earlier, contributing to an RRSP can significantly reduce your current-year tax bill. For instance, suppose you earned $80,000 this year and contributed $10,000 to your RRSP. When it’s tax time, the CRA will consider your income as $70,000, providing valuable tax savings. However, keep in mind that this strategy defers taxes to retirement when you withdraw the funds.
There is also the Home Buyers’ Plan (HBP), which is a federal program that allows eligible first-time home buyers to withdraw up to $60,000 tax-free from their RRSP to put toward a down payment on their first home. Withdrawals must be repaid to your RRSP over a period of 15 years. For more details, check out our article by Winnipeg Real Estate Agent, David Stasica: Understanding the Home Buyers’ Plan.
In addition to the HBP, another exciting program that just came out is the First Home Savings Account. The FHSA operates with the benefits of a TFSA (tax-free growth) and still allows you to reduce your taxable income similar to an RRSP. To learn more about the FHSA, click here.
For more articles on personal finance and investing fundamentals by the Modern Money research team, click here.
