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A Registered Retirement Savings Plan (RRSP) is a registered, tax-advantaged savings account set up by the Government of Canada to help Canadians save for retirement.
Here are some of the tax advantages and benefits that your RRSP offers as you save:
- Tax-deductible: Contributing to your RRSP helps to reduce your taxable income as contributions are deductible.
- Savings grow tax-free: As long as your money is in an RRSP, any income or growth you earn isn’t taxed.
- Defer taxes: You don’t pay any taxes until you start making withdrawals from your RRSP. The expectation is that by the time you start taking out money in retirement, you’ll be in a lower income bracket and won’t have to pay as much in taxes.
- Fund your education or your first home: Although RRSPs are specifically designed to save for retirement, you are able to use those savings in other ways. With the Home Buyers' Plan (HBP) and the Lifelong Learning Plan (LLP), you can borrow money from your RRSP to fund your education or buy your first home without tax penalties, so long as you follow the repayment schedule and have the money back in your RRSP within 15 years.
An RRSP is a great way to start preparing for your future. To ensure you are getting the most out of it, here are seven 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.1 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.
It’s great to plan for your future, but putting too much into your RRSP can be costly. Overcontributions 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 $32,490 for 2025 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.
A Scotiabank advisor can help review your options and recommend a solution that works best for you.
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 help you accumulate significant savings 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.
To get a clearer picture of how saving early positively impacts your retirement savings, consider this scenario:3
Susan and Mark would both like to retire at age 65. Susan starts saving $100 biweekly when she’s 30. Mark decides to put off saving until he’s 45 but will contribute twice as much – $200 biweekly to help catch up.
By age 65, Susan will have contributed $91,000 in 35 years, while Mark will have contributed $104,000 in 20 years. However, Susan will actually retire with $64,510 more than Mark – even though she contributed $13,000 less.
With the 15-year head start to grow her savings and the power of compound growth, Susan’s $91,000 contribution grew to $240,882, while Mark’s $104,000 contribution grew to $176,372.
While it’s great that you’re meeting the RRSP contribution deadline each year, it’s important to remember not to leave your money parked in cash for long periods of time.
Holding a portion of your long-term savings in cash can actually reduce overall performance of your portfolio – something commonly referred to as “cash drag”.
While cash can provide stability as its value doesn’t fluctuate as much as other asset classes, its value often doesn’t go up much over time, subjecting you to inflation risk. If you’ve felt the pinch of higher costs for goods and services at the cash register, you’re familiar with the concept of inflation. Inflation risk grows over time as costs keep rising, meaning it can have an even bigger impact on your savings over longer periods of time. If your cash doesn’t keep up with rising prices, you’ll lose purchasing power. That means cash can have a negative real rate of return after being adjusted for inflation.
In the following scenario, we demonstrate the outcome of investing $10,000 three different ways over a 10-year period: 100% invested in an illustrative balanced portfolio; 50% in a balanced portfolio and 50% cash; and 100% parked in cash.4
As Figure 1 shows, cash can be a real drag when it comes to your retirement portfolio. Over longer periods, cash significantly underperforms, which can lead to falling short of your goals. The higher the allocation to cash, the bigger the drag it can have on your overall portfolio returns.
Figure 1:4
Many couples might not consider a spousal RRSP when they each have their own, but understanding the benefits will help you determine if this is a good option.
- Immediate tax break: For every dollar you contribute to your personal or spousal RRSP, your taxable income for the year is reduced by an equal amount. This is ideal for high-income earners as it allows them to reduce their taxable income.
- Potential tax break later: The long-term goal of investing in a spousal RRSP is to minimize taxes for a couple during retirement by putting retirement income in the hands of the lower-income spouse.
By opening a spousal RRSP, you're essentially income splitting when you eventually draw down on these funds in your retirement years. The spousal RRSP allows the higher income earner to move their contributions into the hands of the spouse with a lower income. Then, when both partners retire, their incomes may be closely aligned, which may reduce overall taxes owed.
Setting up a spousal RRSP is ideal for couples who expect a significant difference in their retirement income. From a tax perspective, having two people in a lower overall tax bracket is more advantageous than one in a high tax bracket and the other in a low tax bracket.
If the funds in your RRSP are earmarked for retirement, chances are you’re investing for the long-term. Depending on your age, there may be decades before you reach retirement. During that time, your investments may fluctuate in value, particularly if your portfolio includes an allocation to mutual funds.
While market swings can be stressful, sticking to your plan by staying invested and maintaining a regular contribution schedule during periods of market volatility can help you stay on track to reaching your goals. 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.
Working with an advisor can help you tune out market noise and stay on track to reaching your financial goals. In fact, 78% of Canadians who work with an advisor say their advisor keeps them on track to meet their goals.5
It’s a great move to open an RRSP and make contributions, but you also have to stay on top of it. Each year, you should take the time to review your retirement goals and investments, including how much annual income you’ll need to retire comfortably – and adjust your plan if needed. A Scotiabank advisor will work with you to create a financial plan to help you achieve your ideal retirement.
