Registered Retirement Savings Plan (RRSP) Deduction

What Is a Registered Retirement Savings Plan (RRSP) Deduction?

A Registered Retirement Savings Plan Deduction is the maximum amount that a Canadian taxpayer can annually contribute to a savings plan and deduct from that year's taxable income.

Generally, the amount is 18% of the taxpayer's earned income for the previous year, up to an annual limit. For tax year 2020, the RRSP limit was $27,230. For 2021 it rose to $27,830, and for 2022, to $29,210.

An individual's contribution limit can be determined by filling out Form T1028, which is available online.

Understanding the RRSP Deduction

Anyone can, of course, contribute less than the allowable maximum. As this is a deduction from taxable income, it is in the taxpayer's best interest to save the maximum in order to minimize the amount of income that is subject to personal income tax.

How an RRSP Works

A Canadian taxpayer can set up a registered retirement savings plan through a financial institution such as a bank, credit union, trust, or insurance company. The financial institution advises its customers on the types of RRSPs and the investments that are available.

Married people, in particular, have decisions to make. A Canadian government site notes that couples can set up a spousal or common-law partner RRSP in order to ensure that their retirement income is evenly split between both partners.

A self-directed RRSP allows an investor to make their own investment choices, buying and selling at will.

The greatest benefit is achieved if the higher-income partner contributes for the lower-income partner. In that case, the contributor will get the immediate benefit of the tax deduction for that year's contributions. But the annuitant, who is likely to be in a lower tax bracket during retirement, will receive the income and report it.

Other Choices

If you prefer to take charge of your own investments, you may want to set up a self-directed RRSP. This type of plan allows you to build and manage your own investment portfolio by buying and selling any of a variety of investments.

Generally, the money you invest in your RRSP account and the returns on that investment are tax-deferred until you cash it in, make a withdrawal, or receive a payment from the plan. In most cases, that should be after you retire.

Locked-In or Unlocked

RRSP plans may be either locked-in or not locked-in.

The locked-in retirement account, or LIRA, is similar to a company or government pension plan. Only the employer may contribute money to the account. Withdrawals before retirement are not permitted, and withdrawals after retirement are paid in regular installments, like an annuity. (Some provinces permit some hardship withdrawals.)

An unlocked plan permits withdrawals at any time, with the caveat that you'll owe the income taxes in that tax year.

In any case, RRSP contributions are made directly to the RRSP issuer.