RRSP (Registered Retirement Savings Plan)

How an RRSP works: three tax moments

An RRSP is not an investment itself. It is a registered account, a tax wrapper, that can hold savings deposits, GICs, mutual funds, ETFs, stocks and bonds. What makes the wrapper valuable is how the tax rules treat your money at three moments: when it goes in, while it grows, and when it comes out.

Going in, contributions are tax-deductible. Every dollar you contribute and deduct reduces your taxable income by a dollar, which saves tax at your marginal tax rate. For example (as of July 2026), a $10,000 contribution deducted at a 40% marginal rate produces roughly $4,000 in tax savings, usually showing up as a refund at filing time.

While it grows, nothing inside the plan is taxed. Interest, dividends and capital gains all compound untouched, year after year, which is a major advantage over a regular taxable account.

Coming out, every dollar you withdraw is added to your taxable income for that year and taxed at your rate at that time. The whole strategy rests on a timing bet: deduct at a high rate during your working years, pay tax at a lower rate in retirement, and keep the difference.

The refund is the most visible payoff, but it is not the only way to collect. If you contribute steadily through the year, you can file CRA form T1213 to have your employer reduce the tax withheld from each paycheque, which turns next spring's refund into higher take-home pay right now. And there is no minimum age to open an RRSP: what you need is earned income that created room. At the other end, you can contribute to your own plan until December 31 of the year you turn 71.

Contributing and deducting are two separate decisions

Here is the part most Canadians never learn: contributing and deducting are not the same thing. Contributing means putting money into the account. Deducting means claiming that contribution against your income on your tax return. You must report every contribution on Schedule 7, but the deduction itself is a choice, and you can carry it forward indefinitely.

Why would anyone delay a deduction? Because a deduction is worth more when your income is higher. Suppose (as of July 2026) you contribute $8,000 in a year when your marginal rate is 20%. Deducting immediately saves about $1,600. If you know a promotion will push your marginal rate to 40% within a couple of years, carrying the deduction forward makes the same contribution worth about $3,200 instead. Meanwhile, the money is already growing tax-deferred inside the plan, so you lose nothing by waiting.

This is especially useful for students, parents on leave, and anyone with a temporarily low income who still wants to get money invested early. Contribute when you have the cash, deduct when the deduction pays best. The contribution must still respect your deduction limit for the year you make it.

How much room you get

Your RRSP contribution room grows each year by 18% of your previous year's earned income, up to an annual dollar limit of $33,810 for 2026 and $32,490 for 2025 (as of July 2026). Earned income mainly means employment and self-employment income, plus a few other items such as net rental income. Investment income does not count.

For example (as of July 2026), someone who earned $80,000 in 2025 generates $14,400 of new room for 2026, which is 18% of $80,000 and well below the dollar limit. The dollar limit only bites at higher incomes: it takes about $187,833 of earned income in 2025 to reach the 2026 maximum of $33,810.

If you belong to a workplace pension plan, your new room is reduced by a pension adjustment that reflects the value of what accumulated in your pension that year. It appears on your T4 slip.

Two details trip people up. First, contributions to a group RRSP at work count against the same limit as your personal contributions, so add them together. Second, room is created by earned income, not by contributing: you build room even in years you contribute nothing, but you must file a tax return so the CRA can record it.

Unused room never expires. Whatever you do not use this year carries forward indefinitely, which is why many Canadians in their 40s discover tens of thousands of dollars of accumulated room. The exact number is on your latest notice of assessment and in CRA My Account.

The deadline: the first 60 days rule

RRSP contributions do not follow the calendar year. Contributions made in the first 60 days of a year can be deducted on the previous year's tax return. The deadline for the 2025 tax year was March 2, 2026 (as of July 2026). That is why every February the banks run their RRSP season campaigns.

A first-60-days contribution does not have to be deducted for the prior year. You report it on Schedule 7 for that prior year, but you can apply the deduction to the prior year, the current year, or any future year, whichever pays best. Your financial institution issues separate contribution receipts for first-60-days contributions, and the CRA expects to see them on the prior year's Schedule 7 even if you deduct nothing.

Over-contributions: a small buffer, then a monthly penalty

The rules give you a lifetime $2,000 buffer (as of July 2026) above your available room before penalties start. This cushion exists so an honest miscalculation does not immediately cost you money, but you get no deduction for the excess amount.

Beyond the buffer, the CRA charges a penalty tax of 1% per month (as of July 2026) on the excess for every month it stays in the account, and you generally have to file a T1-OVP return to report it. If you discover an over-contribution, withdrawing the excess promptly stops the meter.

Withdrawals: taxed as income, with withholding at source

You can withdraw from an RRSP at any age, but every withdrawal outside the special programs below is added to your taxable income. Your financial institution also withholds tax at source (as of July 2026): 10% on amounts up to $5,000, 20% from $5,001 to $15,000, and 30% above $15,000 in most provinces. In Québec, the federal withholding is 5%, 10% and 15% on the same tiers, plus Québec provincial withholding of 14%.

Withholding is a prepayment, not the final bill. The real tax is settled when you file, at your marginal rate for the year. Splitting a large withdrawal into smaller chunks lowers the upfront withholding but changes nothing about the final tax.

One more cost is easy to miss: withdrawn amounts do not restore your room. Unlike a TFSA, where withdrawals come back as new room the following year, RRSP room is gone once used. That makes the RRSP a poor emergency fund.

The tax on withdrawals is not always a drawback, though. In a low-income year, a layoff, a sabbatical, a return to school, withdrawing from an RRSP at a temporarily low marginal rate can be smart planning: you deducted at a high rate and repaid at a low one, exactly as the account was designed, just earlier than retirement.

Borrowing from yourself: the Home Buyers' Plan and Lifelong Learning Plan

The Home Buyers' Plan (HBP) lets a first-time buyer withdraw up to $60,000 (as of July 2026) from an RRSP tax-free to buy or build a qualifying home, and each partner in a couple can use their own plan. The catch is repayment: you must repay the amount to your RRSP over up to 15 years, and any missed annual repayment is added to your taxable income for that year. Repayments normally begin the second year after the withdrawal, and withdrawals made from 2022 to 2025 benefit from a temporary five-year grace period before repayments start (as of July 2026).

The Lifelong Learning Plan (LLP) applies the same borrow-from-yourself logic to education: up to $10,000 per year and $20,000 in total (as of July 2026) for full-time training or education for you or your spouse, repayable over 10 years.

Spousal RRSPs in one paragraph

A spousal RRSP lets the higher-income partner contribute to a plan owned by the lower-income partner. The contributor uses their own room and takes the deduction at their higher marginal rate, while the money is eventually withdrawn and taxed in the lower-income partner's hands, a simple form of income splitting for retirement. Watch the 3-year attribution rule: if any spousal contribution was made in the year of a withdrawal or in the two previous calendar years, the withdrawal is taxed back to the contributor instead.

The end of the road: age 71

An RRSP cannot last forever. By December 31 of the year you turn 71, you must close it and choose what happens next: convert it to a Registered Retirement Income Fund (RRIF), buy an annuity, or cash it out. Cashing out is rarely wise, since the entire balance becomes taxable income at once.

Most people convert to a RRIF. The account keeps growing tax-deferred, but starting the year after the conversion you must take out at least the RRIF minimum withdrawal every year, a percentage that rises with age. If your spouse is younger than 71, you can also keep contributing to a spousal RRSP after your own deadline, as long as you still have room.

You do not have to wait until 71 either. You can convert part or all of an RRSP to a RRIF earlier, and many people convert a portion at 65 because RRIF withdrawals from that age qualify for the pension income tax credit and for pension income splitting with a spouse.

RRSP or TFSA: a simple decision framework

The choice comes down to one comparison: your marginal tax rate today versus your expected rate in retirement. The RRSP wins when today's rate is higher, because you deduct at a high rate and repay at a low one. The TFSA wins when today's rate is lower, which is common early in a career. When the two rates are about equal, the accounts are mathematically equivalent, and the TFSA's flexibility often tips the balance.

There is a second-order effect for large balances. RRIF withdrawals count as income, and a big enough RRIF can push a retiree into the OAS clawback zone, where each extra dollar of income also reduces Old Age Security benefits. TFSA withdrawals do not count as income and never trigger the clawback, which is one reason retirees with substantial RRSPs often draw them down strategically before 71.

One caution about the famous refund: it is not free money, it is a return of tax you prepaid. A fair RRSP versus TFSA comparison assumes the refund gets reinvested. Spend the refund every year instead, and the RRSP's advantage shrinks or disappears, even when your retirement tax rate is lower.

• Higher income now than you expect in retirement: favour the RRSP.
• Lower income now (student, early career, parental leave): favour the TFSA, or contribute to the RRSP and delay the deduction.
• Counting on income-tested benefits in retirement (OAS, GIS): lean toward the TFSA.
• Room in both and cash to spare: use both. An RRSP refund can fund a TFSA contribution.