How to use your RRSP as a growth accelerator

The first feature of an RRSP is that the returns on the investments are tax-free until they’re withdrawn. Gains within the plan don’t increase your taxable income or tax paid. Over the long term, with compound returns, this tax advantage is a powerful lever that can help you achieve financial independence.

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RRSP contributions are deducted from your taxable income. This attractive feature sets the RRSP apart from other investment vehicles, such as the Tax Free Savings Account (TFSA).

When you contribute to an RRSP, you recover the tax you would otherwise pay on the amount contributed and you can then invest it in the RRSP. With no extra effort, you can use your tax refund to increase your savings year after year. Not only can you accelerate the pace of your contributions, but you can also earn a return on funds that otherwise would be paid as taxes.

By reducing your net taxable income, an RRSP can make you eligible for social programs and tax credits or can increase the amount of your benefits. The Canada child benefit, the family allowance and refundable tax credits, such as the GST credit and the solidarity tax credit, can all be increased thanks to RRSP contributions. Even your children’s RESPs can be enhanced if you reduce your net taxable income below the thresholds set by the federal government.

This additional income can be invested to accelerate the growth of your assets.

• Maximum contribution: 18% of gross income to a maximum of $29,210 for 2022 and $30,780 for 20231¹
• Unused contributions carried forward to subsequent years
• Tax-sheltered returns
• Taxable withdrawals
• Tax-free withdrawals with an HBP or an LLP

The RRSP can be an effective way to quickly accumulate a down payment for the purchase of a house or condo. Under the Home Buyers’ Plan (HBP), you can withdraw up to $35,000 from your RRSP tax-free. The amount withdrawn must be repaid within 15 years, however.

The HBP, combined with potential tax refunds, allows you to accumulate a down payment for a real estate investment more easily.

The RRSP offers a mechanism similar to the HBP to finance a return to school: the Lifelong Learning Plan (LLP). You can withdraw up to $20,000 from your RRSP without being taxed, provided you repay the funds within 10 years.

In this way, tax refunds and increased benefits can also help you finance your return to school and perhaps increase your value on the job market.

RRSP withdrawals are added to your taxable income. Some refer to tax refunds as “tax deferral.” Keep in mind, however, that RRSPs allow you to earn tax-free compound returns for many years on this tax deferral, if you take care to reinvest it in your RRSP, as well as on your contributions.

Generally speaking, because withdrawals are taxable, you won’t withdraw funds from your RRSP until you retire or become financially independent. At that point, you may have less need for income.

Your taxable income may be lower when you withdraw funds from your RRSP than when you made your contributions. Note also that no social contributions to plans such as Employment Insurance, the Quebec Pension Plan or the Quebec Parental Insurance Plan are deducted from funds withdrawn from RRSPs. Moreover, no group insurance contributions, social club fees or union dues are payable on withdrawals.

Thus, even when you withdraw funds, the RRSP offers a benefit that promotes asset growth.

After age 71 

On December 31 of the year you turn 71, it becomes impossible to contribute to your RRSP. Your RRSP has to be converted into a Registered Retirement Income Fund (RRIF). Thereafter, you must withdraw a minimum amount from your RRIF every year.

The RRSP is a powerful way to accelerate the growth of your investments. For the 2022 tax year, the RRSP contribution deadline is March 1, 2023.

Don’t delay!