A Beginner’s Guide to Investing (Part 7): Registered Retirement Savings Plan (RRSP)

In Part 6, we explored the Tax-Free Savings Account (TFSA), one of the most flexible and valuable investment accounts available to Canadians. In this article, we will explore the Registered Retirement Savings Plan (RRSP), another important savings vehicle for Canadians. RRSPs have been available since 1957 and remain one of the most important retirement savings tools available to Canadians. Let us understand what an RRSP really is and what it is not.

1. What is a Registered Retirement Savings Plan (RRSP)?

RRSPs were introduced in Canada in 1957 to encourage Canadians to save for retirement by offering specific tax advantages. In simple terms:

a) RRSP contributions are tax-deductible
When you contribute money to an RRSP, the amount you contribute reduces your taxable income. For example, if your employment income is $90,000 and you contribute $6,000 to your RRSP, you pay income tax as though you earned $84,000 instead of $90,000.

b) Your investments grow tax-deferred
You do not pay tax each year on interest, dividends or capital gains earned while your investments remain inside the RRSP.

c) You pay tax when you withdraw money from your RRSP
The amount you withdraw is added to your taxable income for that year and taxed as income.

2. RRSP Contribution Room

Unlike the TFSA, where everyone gets the same contribution room, the RRSP contribution room that you get is based mainly on your previous year’s earned income. As of 2026, the formula is 18% of last year’s earned income, up to a maximum of $33,810.

Earned income includes:

• Employment income, i.e. salary/wages, bonuses, tips and other taxable benefits.
• Self-employment income.
• Net rental income.
• Certain taxable support payments you receive.

Note: Earned income does not include interest, dividends, pension income, CPP and OAS.

CRA provides your total RRSP contribution room on your Notice of Assessment, and you can also view it in CRA My Account.

Remember: New RRSP contribution room is created only from earned income. If you had no earned income in the previous year, you will not receive any new RRSP contribution room for the current year.

Unused Contribution Room Isn’t Lost

If you don’t contribute in a given year, you don’t lose that contribution room. It carries forward and can be used in any future year. The CRA keeps track of your unused contribution room and reports it on your Notice of Assessment.

3. Opening an RRSP

You can open an RRSP at most financial institutions, including banks, credit unions, trust companies and online brokerages. To open an RRSP, you must be a Canadian resident and have a valid Social Insurance Number (SIN).

You can have one or more RRSP accounts, either at the same financial institution or at different ones. However, the total amount you contribute to all of your RRSP accounts combined must not exceed your available RRSP contribution room.

Some employers also offer a Group RRSP (GRRSP) or a Pooled Registered Pension Plan (PRPP) as part of their employee benefits. If you participate in one of these plans, your employer will usually arrange the account setup and may even match some of your RRSP contributions, providing an additional retirement benefit.

Note: If you participate in an employer pension plan, your available RRSP room for the following year will be reduced by a Pension Adjustment (PA), reflecting the value accumulated in your pension plan.

4. Choosing Investments for Your RRSP

Opening an RRSP is only the first step. Like a TFSA, an RRSP is an investment account (or container) that can hold many different types of investments, including savings accounts, GICs, bonds, stocks, mutual funds and ETFs.

There are two common ways to invest through an RRSP:

• Self-directed RRSP: You choose and manage your own investments, such as stocks, ETFs or mutual funds. In other words, you decide which investments to buy and when to sell them. This option gives you the greatest flexibility and is often preferred by experienced investors and those who want to keep investment costs low.
• Managed RRSP: You leave the investment decisions to a financial institution or investment advisor. They recommend or select investments on your behalf and usually charge a management fee for this service.

You can hold many common investments inside an RRSP, including cash, GICs, bonds, mutual funds, ETFs and stocks from Canada, the U.S. and other countries

5. You can Contribute up to 60 Days in the Following Year

Unlike most tax deadlines that end on December 31, the RRSP gives you extra time. You can make contributions for the current tax year up to 60 days into the following calendar year, subject to your available contribution room.

This 60-day window gives you extra time to calculate your final annual income, gather funds and make a last-minute contribution.

Applying First 60-Day Contributions to the Current Tax Year

It is a common misconception that contributions made in the first 60 days of the calendar year must be deducted on your previous year’s tax return. While the CRA requires you to report all contributions made during the first 60 days on your tax return for the previous year, you have flexibility in how you claim the deduction:

• Deduct it for the previous tax year: Use it to lower your taxes owing or boost your refund for the year that just ended.
• Deduct it for the current tax year: If you already maxed out your previous year’s limit, or expect your income (and tax bracket) to be significantly higher this year, you can apply the deduction to the current calendar year instead.

For example, suppose you have $5,000 of available RRSP contribution room as of December 31, 2026. In January 2027, you contribute $5,000 to your RRSP. You have two choices for how to claim that contribution:

• Use it to lower 2026 taxes: Claim the deduction on your 2026 return (filed in Spring 2027). This is ideal if you expect your 2027 income to be similar to or lower than your 2026 income, allowing you to take advantage of the tax savings right away.
• Use it to lower 2027 taxes (or later): If you expect your 2027 income to be significantly higher than in 2026, you can report the $5,000 contribution on your 2026 tax return without claiming the deduction. The $5,000 will automatically carry forward as an unused contribution, allowing you to claim the tax break on your 2027 tax return (filed in Spring 2028), which will result in bigger tax savings.

6. Avoid Over-Contributing

Be careful not to contribute more than your available RRSP contribution room, as detailed in your notice of assessment. Keep a log of contributions you make to your RRSP to avoid over-contribution. To accommodate calculation mistakes, the CRA allows a $2,000 lifetime excess-contribution buffer; however, contributions above that amount can be subject to a 1% monthly tax until the excess is corrected.

For more details, see: Understanding RRSP Overcontribution Rules

7. How does the RRSP Tax Deduction work?

Suppose you contribute $8,000 to your RRSP and use it to buy investments such as stocks, ETFs, or GICs. How does that contribution actually benefit you at tax time?

When you contribute money to an RRSP, your financial institution issues an official tax slip (or contribution receipt). These slips are mailed to you or made available for download in your online account.

When you file your tax return, you must report all contribution receipts — including those for contributions made during the first 60 days of the calendar year. You then have two choices:

1. Claim the RRSP deductions on your tax return to reduce your total tax payable.
2. Carry forward the deductions to a future year.

Most investors choose Option 1. However, if you anticipate a significant jump in income in the near future, Option 2 can yield greater overall tax savings.

NOTE: If you are unsure which option fits your personal situation best, consider consulting a qualified tax professional.

Understanding Tax Savings: An Example

Let’s see how an RRSP contribution impacts your tax situation using a simplified example:

• Annual Income: $100,000
• RRSP Contribution: $10,000
• Claimed RRSP Deduction: $10,000
• Income subject to tax after the RRSP deduction: $90,000. Because you claimed the $10,000 deduction, you are taxed as if you earned $90,000 instead of $100,000.

Throughout the year, your employer automatically withholds income tax from every paycheque based on your full $100,000 salary. When you file your tax return and claim the $10,000 RRSP deduction, the CRA recalculates your tax bill on $90,000 of income — resulting in a tax refund for the excess tax withheld.

A Refund Is Not “Free Money”

It is essential to recognize that the refund you get after you file your tax return, after contributing to an RRSP and claiming it on your tax return, is not some kind of free money or bonus. It is simply the refund of some of the income tax you already paid during the year because your RRSP contribution reduced your taxable income.

8. What’s Next?

An RRSP is a powerful retirement savings tool, but there is much more to understand about how it works throughout your life.

Future articles will explore topics such as

• RRSP withdrawals and taxation
• What happens to your RRSP as you approach age 71
• Converting an RRSP to a RRIF
• How an RRSP compares with a TFSA.
• Spousal RRSP

We will also look at some strategies for making the most of your RRSP while minimizing taxes.

As these articles are published, I will add links to them here.

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.