RRSP Complete Guide: How it Works

Introduction: Why RRSPs Matter Even When Retirement Feels Far Away

Even if retirement feels far away, a Registered Retirement Savings Plan (RRSP) can save you thousands in taxes today while preparing for the future.

Here’s something most people don’t realize until tax season hits: contributing to an RRSP doesn’t just help future you—it puts money back in your pocket right now. That $5,000 you contribute could reduce your tax bill by $1,500 or more, depending on your income. That’s not retirement money you’ll see in 40 years—that’s cash you get back in your next refund.

But RRSPs can be confusing, especially when everyone also tells you to open a TFSA. If you’re a newcomer to Canada or just starting your career, the tax terminology alone can feel overwhelming. This guide breaks down exactly how RRSPs work, when they make sense for you, and how to avoid the mistakes that cost Canadians thousands every year.

---

What Exactly Is an RRSP?

A Registered Retirement Savings Plan is a government-registered account designed to help Canadians save for retirement while getting tax breaks along the way. Think of it as a deal with the CRA: they let you skip paying taxes on the money you contribute now, it grows tax-free inside the account, and you pay tax on it later when you withdraw during retirement (when you’re presumably in a lower tax bracket).

Here’s how it works in practice: Let’s say you earn $60,000 and contribute $5,000 to your RRSP. When you file your taxes, your taxable income drops to $55,000. Depending on your province, that could mean $1,500+ back in your pocket. That contribution didn’t cost you $5,000—it cost you more like $3,500 after the tax refund.

The real magic happens inside the account. Just like a TFSA, you can hold various investments in your RRSP—stocks, bonds, ETFs, mutual funds, GICs, even high-interest savings. All the growth, dividends, and interest accumulate without any tax consequences until you eventually withdraw the money.

Who Should Have an RRSP?

RRSPs tend to be more beneficial when:

• You earn $50,000+ annually (higher tax brackets benefit most)
• You’ve maxed out your TFSA or have room for both
• You’re focused specifically on retirement savings
• You’re comfortable not touching the money until retirement
• You want to reduce your current tax bill

You might want to prioritize a TFSA first if:

• You’re in a low tax bracket (under $50,000)
• You’re saving for non-retirement goals (home, travel, emergency fund)
• You’re still figuring out your career path
• You want maximum flexibility with withdrawals

---

RRSP vs TFSA: The Complete Comparison

The Math That Makes the Difference

Let’s compare two identical scenarios:

Scenario A - TFSA:

• You earn $70,000 and want to save $10,000
• You pay tax on your full income
• You contribute $10,000 after-tax dollars to your TFSA
• It grows to $50,000 over 20 years
• You withdraw $50,000 tax-free

Scenario B - RRSP:

• You earn $70,000 and contribute $10,000 to your RRSP
• Your taxable income drops to $60,000 (you save roughly $3,000 in taxes)
• That $10,000 grows to $50,000 over 20 years
• You withdraw it in retirement when you’re in a lower bracket (say 20% instead of 30%)
• You pay $10,000 in tax, keeping $40,000

Wait—that sounds worse, right? Here’s the key: you also got that $3,000 tax refund upfront. If you invested that refund too, you’d actually come out ahead. Plus, most people are in lower tax brackets during retirement, making the math even better.

Many Canadians use a combination of both, depending on their goals. RRSP for retirement and tax savings, TFSA for everything else.

---

RRSP Contribution Limits (2025)

Understanding contribution limits is critical. Unlike TFSAs which have a fixed annual limit, your RRSP room depends on your income.

How RRSP Contribution Room Actually Works

Here’s a real example: You earned $55,000 in 2024. Your 2025 RRSP contribution room would be 18% of $55,000 = $9,900, plus any unused room from previous years.

If you started your first job in 2024 and earned $45,000, you’d have $8,100 in RRSP room for 2025 (18% of $45,000). But if you don’t contribute anything in 2025, that $8,100 carries forward. In 2026, if you earned $50,000 in 2025, you’d have $8,100 + $9,000 = $17,100 available.

Important deadline: You can contribute to your RRSP for the previous tax year up until March 1st. So contributions made between January 1 and March 1, 2026 can count toward your 2025 taxes if you choose.

Check your room: Don’t guess your contribution limit. Log into your CRA My Account to see your exact available room. Your Notice of Assessment also shows this amount.

What Counts Toward Your RRSP Limit?

• Your personal contributions
• Employer contributions (if you have a group RRSP)
• Spouse or partner contributions to a spousal RRSP on your behalf

What doesn’t reduce your room:

• Investment growth inside your RRSP
• Transfers from another RRSP

---

Advantages of an RRSP

Beyond the Basics: Hidden RRSP Benefits

Income splitting with a spousal RRSP: If you earn significantly more than your spouse, you can contribute to a spousal RRSP in their name. You get the tax deduction at your higher rate, but they withdraw it later at their lower rate. This is one of the best legal tax strategies available.

Protection from creditors: In most provinces, RRSPs are protected from creditors if you declare bankruptcy (except for contributions made in the 12 months before bankruptcy). This doesn’t apply to TFSAs.

Home Buyers’ Plan (HBP): First-time homebuyers can withdraw up to $35,000 from their RRSP for a down payment, tax-free. You have 15 years to pay it back. This is basically an interest-free loan from yourself.

Lifelong Learning Plan (LLP): Withdraw up to $10,000 per year (max $20,000 total) to fund full-time education for you or your spouse. Again, you repay it over 10 years.

---

Common RRSP Mistakes to Avoid

Even seasoned Canadians mess these up. Here’s what to watch for:

1. Contributing When You’re in a Low Tax Bracket

If you earn $35,000, your RRSP deduction saves you maybe 20% in taxes. But if you withdraw that money in retirement when you’re still at 20%, you gained nothing. The RRSP only works when you contribute at a high tax rate and withdraw at a low rate. Focus on your TFSA first if you’re early in your career.

2. Not Maximizing Employer Matching

If your employer matches RRSP contributions, that’s free money—sometimes 50-100% returns immediately. If they match up to 5% and you only contribute 3%, you’re leaving money on the table. Always contribute at least enough to get the full match.

3. Withdrawing Early for Non-Emergencies

When you withdraw from an RRSP (outside HBP or LLP), three things happen:

• You pay immediate withholding tax (10-30% depending on amount)
• That money gets added to your income, potentially pushing you into a higher bracket
• You permanently lose that contribution room

A $10,000 withdrawal could cost you $3,000+ in taxes, and you can never put that $10,000 back. This is why RRSPs are for long-term goals only.

4. Forgetting to Claim Your Deduction

Here’s a strategy many miss: you can contribute to your RRSP but delay claiming the deduction. Why? If you’re in a low bracket now but expect higher income soon (promotion, career change), contribute today but claim the deduction next year when it’s worth more. Your contribution room gets used, but you save the tax benefit for later.

5. Overcontributing

Unlike the $2,000 buffer for honest mistakes, RRSP overcontributions are taxed at 1% per month on the excess. With your Notice of Assessment in hand, this should never happen—but it does, especially with employer contributions people forget to track.

---

The Home Buyers’ Plan (HBP): Using Your RRSP to Buy a Home

This deserves its own section because it’s one of the most useful RRSP features for young Canadians.

How the HBP Works

If you’re a first-time homebuyer (defined as not owning a home in the last 4 years), you can withdraw up to $35,000 from your RRSP tax-free to use as a down payment. Your spouse can also withdraw $35,000, meaning a couple could access $70,000 combined.

The catch? You must repay 1/15th of the amount each year for 15 years. Miss a payment and the CRA adds that year’s minimum to your income.

HBP Strategy

Here’s a smart approach many use:

1. Contribute to your RRSP when you’re in a high tax bracket
2. Get the tax refund (say $2,500 on a $10,000 contribution)
3. Wait 90 days (required holding period)
4. Withdraw that $10,000 for your home purchase via HBP
5. Repay it slowly over 15 years, essentially having reduced your down payment cost by $2,500

This works best if you’re already planning to buy within 1-2 years and would be contributing to an RRSP anyway.

---

How to Open and Manage Your RRSP

Step 1: Choose Your Account Type

Self-directed RRSP: You pick the investments (stocks, ETFs, bonds). Best for hands-on investors comfortable making decisions. Available through Questrade, Wealthsimple Trade, and most banks.

Managed RRSP: A robo-advisor or professional picks investments for you based on a questionnaire. Good for beginners. Check out Wealthsimple, Questwealth, or BMO SmartFolio.

Group RRSP: Through your employer. Often comes with matching contributions. Always participate if matching is offered.

Mutual fund RRSP: Through banks, usually higher fees. Not recommended unless you’re getting financial advice that justifies the cost.

Step 2: Pick Your Investments

Your RRSP isn’t an investment—it’s an account that holds investments. Inside your RRSP, you might have:

• ETFs (Exchange Traded Funds): Low-cost, diversified. Great for most people. Popular choices include VGRO, XEQT, or VFV.
• Mutual funds: Higher fees but professionally managed. Only worth it with employer plans that subsidize costs.
• GICs: Guaranteed returns, very safe. Good for money you’ll need within 5 years or if you can’t stomach volatility.
• Individual stocks: Higher risk, requires research. Only if you know what you’re doing.
• High-interest savings: Safe parking spot while you decide where to invest.

If you’re decades from retirement - some experts suggest higher equity allocations for younger investors, though the right mix depends on your comfort with risk.

Step 3: Automate Your Contributions

Set up automatic monthly contributions. Even $200/month = $2,400/year, which could save you $500-800 in taxes while building your retirement fund. You’ll adjust to the reduced take-home pay within a month or two.

---

RRSP Strategies by Income Level

Earning $30,000 - $50,000

Focus on your TFSA first. Your tax bracket is relatively low, so the RRSP deduction isn’t as valuable. Exception: if your employer offers matching, contribute at least enough to get the full match.

Earning $50,000 - $80,000

This is the sweet spot where RRSPs start making sense. Consider splitting between TFSA and RRSP, or prioritize RRSP if you’re in the 30%+ marginal bracket. Max your TFSA first if you’re planning to buy a home soon.

Earning $80,000+

High earners often prioritize RRSP contributions for the tax savings. You’re in a high enough bracket that the tax savings are substantial. If you max out your RRSP and TFSA, consider spousal RRSPs for income splitting or non-registered investment accounts.

For Newcomers to Canada

You don’t earn RRSP contribution room until you file a Canadian tax return. Your first year in Canada, focus on opening a TFSA and building your credit. Starting in year two, you’ll begin accumulating RRSP room based on your Canadian income.

---

What Happens to Your RRSP at Age 71?

By December 31st of the year you turn 71, you must convert your RRSP into either:

1. RRIF (Registered Retirement Income Fund): The most common choice. You’re forced to withdraw a minimum percentage each year, which gets taxed as income.

2. Annuity: An insurance company pays you a fixed amount for life. Less common these days.

3. Lump sum withdrawal: You cash everything out and pay tax on the entire amount. Almost never a good idea unless the account is small.

Most people choose the RRIF option since it maintains tax-deferred growth while forcing you to gradually draw down the account.

---

RRSP vs Pension: How They Work Together

If you have a workplace pension (defined benefit or defined contribution), it affects your RRSP contribution room. The pension adjustment (PA) reduces your available RRSP room because you’re already building retirement savings through your pension.

For example, if your pension contribution is deemed worth $8,000 by the CRA, that $8,000 reduces your RRSP limit. Check your T4 slip for your PA amount—it’s reported there annually.

Having both is ideal: maximize what your employer pension offers, then use RRSP room for additional savings.

---

Real-World RRSP Example

Meet Sarah: 28 years old, earns $65,000, works in Toronto. She has $15,000 in TFSA (maxed), no debt, and $500/month extra to save.

Her strategy:

1. Contributes $6,000/year to RRSP ($500/month)
2. Gets roughly $1,800 back in tax refunds
3. Puts that refund into her TFSA
4. Invests RRSP in 90% stocks/10% bonds (long timeline)
5. Plans to use HBP in 3 years when buying a condo

Result after 3 years:

• RRSP: $20,000+ (contributions + growth)
• Tax savings: $5,400 (over 3 years)
• Can withdraw up to $20,000 via HBP for down payment
• Net cost of that $20,000 down payment: only $14,600 after tax savings

She’s built a down payment while paying less out of pocket, thanks to the RRSP deduction.

---

Next Steps: Open Your RRSP and Start Saving Smartly

If RRSPs make sense for your situation, there’s no reason to delay. Every year you wait is a year of potential tax savings lost. Even starting with $100/month builds momentum and establishes the habit.

Remember: personal finance is called “personal” for a reason. What works for your coworker or sister might not work for you. Consider your income, goals, timeline, and comfort with risk.

Ready to get started?

Low-fee investment platforms: Invest with Wealthsimple | Invest with Questrade

Still deciding between RRSP and TFSA? Read the TFSA guide

The best RRSP strategy is the one you’ll actually stick with. Start small, stay consistent, and adjust as your income grows. Your 65-year-old self is counting on the decisions you make today.

Disclaimer: This content is for educational purposes only and is not intended as financial, investment, or tax advice. Please consult a licensed financial advisor or tax professional for advice specific to your situation.