There are many ways to save for retirement. Some Canadians have access to a retirement savings plan through their workplace. This type of plan allows you to make additional contributions, often with the benefit of matching contributions from your employer. For saving on your own, you basically have two options: registered and non-registered savings.
Registered savings plansThese plans are “registered” with the Canada Revenue Agency (CRA). That means that they receive certain tax advantages. But they may be subject to CRA rules around how much you can contribute each year, what you can invest in (mutual funds, ETFs, GICs, individual stocks and bonds) and how withdrawals will be taxed. Common examples include Registered Retirement Savings Plan (RRSPs) and Tax-Free Savings Accounts (TFSA).
Non-registered investment accountsThese accounts do not offer the same tax savings and deferral benefits of registered options. Instead, you can easily access your money and control how much you contribute or withdraw. All investment income is taxable. The amount may depend on whether the investment income is from interest, dividends or capital gains.
Many Canadians choose RRSPs to save for their retirement. Here’s why:
1. You can lower your income taxes.
RRSPs provide you with important tax advantages. First, there’s the immediate tax benefit of being able to deduct your RRSP contributions on your income tax return. The higher your marginal tax rate, and the more you contribute to your RRSP, the greater the tax benefit.
However, there are limits to how much you can contribute each year. For 2023, you can contribute 18% of the income you earned in the prior year, up to a maximum of $30,780, after any pension adjustments. If you have any unused contribution room from previous years, you can carry that forward to another year.
Also, any income and gains you earn on investments within your RRSP will grow tax-deferred until you withdraw from your RRSP or Registered Retirement Income Fund (RRIF) in retirement. At that point, all withdrawals are taxed as ordinary income at your marginal tax rate. There are still a few benefits here though, because you may be in a lower tax bracket by the time you make those withdrawals than when you were working, and you may be able to use income-splitting strategies between spouses.
2. You are less likely to withdraw money early because of taxes.
With a TFSA or non-registered investments, you may be tempted to dip into your retirement savings if a major expense comes up. Try that with your RRSP and it will cost you in a couple of ways. First, you may have to pay withholding tax of up to 30%. Second, you lose the contribution room associated with those funds permanently.
There are other ways to use your RRSP, which may provide additional benefits.
- With The Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP to buy or build your first home. You have 15 years to pay back the amount you withdrew, starting the second year after you buy (or build) your home.
- With the Lifelong Learning Plan, you can borrow up to $10,000 a year from your RRSP ($20,000 maximum over four years) to go back to school full-time. Again, there are rules about eligibility, and how and when you’ll need to pay back this money.