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A Registered Retirement Savings Plan (RRSP) is a type of investment vehicle that helps you grow your retirement savings. One of the main benefits of an RRSP is that you defer paying taxes on the money you contribute today and any investment income earned, until years later when you withdraw your money in retirement.
To help ensure you are getting the most out of your RRSP, here are five things you should try to avoid.
If possible, try not to withdraw funds from your RRSP before retirement. If you withdraw funds early, you lose that contribution room and the tax-deferred growth that comes with it. Additionally, if your current income is higher than your anticipated retirement income, then you will pay more tax on withdrawals now.
When you withdraw from your RRSP, the funds are subject to withholding tax. This withholding tax is the government's way of ensuring you pay some tax on your withdrawal immediately. Remember that you may have to pay more tax on the withdrawal when you include the withdrawal on your tax return.
Here are the current withholding tax rates (Quebec residents face slightly different rates plus an additional provincial tax):1
- For withdrawals up to $5,000: 10% (19% in Quebec)
- For withdrawals between $5,000 up to $15,000: 20% (24% in Quebec)
- For withdrawals over $15,000: 30% (29% in Quebec)
It’s great to plan for your future, but putting too much into your RRSP can be costly. Over contributions to an RRSP can cost you a penalty of 1% per month on contributions that exceed your RRSP deduction limit by more than $2,000. Keep in mind that you can contribute up to 18% of your previous year’s earned income — up to a maximum of $30,780 for 2023, plus any unused contribution room from previous years.
The best way to avoid an over-contribution penalty? Keep a close eye on your contribution limits, which you can find in your CRA My Account or on your latest tax assessment.
- If you have additional savings, you can also consider a Tax-Free Savings Account (TFSA), which offers a cumulative total contribution room of $95,000 for 2024.2
A Scotiabank advisor can help review your options and recommend a solution that works best for you.
How do you find out your RRSP deduction limit?
Your RRSP deduction limit can be found on your most recent Notice of Assessment from the Canada Revenue Agency (CRA). You can also find it on your online myCRA account.
Time is on your side when it comes to contributing to an RRSP – contributing early and regularly can help you build your savings easily and automatically. Regular contributions (weekly, biweekly or monthly), boosted by the power of compound growth can accumulate significantly over time. Speak with a Scotiabank advisor about setting up a Pre-Authorized Contribution (PAC) plan that works best with your financial situation to help achieve your savings goals.
Keep in mind that an RRSP is a long-term investment. Depending on your age, there may be decades before you reach retirement. While market swings can be stressful, it’s important to stay invested and maintain a regular contribution schedule – even when markets get choppy. Having a longer-term perspective and taking a diversified approach to investing – aligned to your risk tolerance and specific time horizon – is often the best approach.
It’s not enough to open an RRSP and make a lump sum contribution. Each year, you should take the time to re-evaluate your retirement goal and how much annual income you’ll need to do so comfortably – and adjust your plan if needed.
2 Some conditions apply. Speak with your Scotiabank advisor for more details.
