There are three common ways to open a Registered Retirement Savings Plan (RRSP), but most people want to know first: “how much can I contribute to a RRSP?”
So you’re wondering, “How Much Can I Contribute to a RRSP?” Great question! Let’s talk about what RRSPs are first, and rest assured that whichever way you choose to invest in a Registered Retirement Savings Plan (RRSP), your investments gain doubly!
They were introduced by the federal government in 1957 to encourage Canadians to save for retirement. Before RRSPs, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income.
RRSPs are a form of tax-deferred savings plan. They are a little like other investment accounts, except for their tax treatment. RRSP contributions are tax-deductible, and the investments grow tax-free.
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How much can I contribute to a RRSP this year?
You can contribute up to 18% of your earned income from the previous year, to a maximum of $29,210 in 2022. (The limit is lower for pension plan members.)
Next year, March 1, 2023 will be the last day you can contribute to an RRSP and deduct your contribution from your 2022 income.
What are RRSP taxes?
You only pay taxes on your RRSP investment, and the income it earns, when you make withdrawals from your RRSP. The money you withdraw is taxed as ordinary income, and a withholding tax is applied at the time you make the withdrawal.
The amount of tax withheld depends on the size of the withdrawal. The rate is 10 per cent for amounts up to $5,000, 20 per cent for amounts of more than $5,000 up to and including $15,000, and 30 per cent for amounts over $15,000. (These amounts vary in Quebec and for non-residents of Canada.)
Are there different ways to invest in RRSPs?
Beyond the question, “how much can I contribute to a RRSP?”, you might also want to know the different ways to invest in one. There are three common ways to invest in an RRSP. The first is making automatic, monthly payments. This is widely accepted as a good way to build your RRSP and to develop investment discipline. You do this through a financial institution which will generally direct the money into mutual funds.
We advise that your automatic investments go into low-fee index funds (in our safety-conscious advisory Canadian Wealth Advisor we recommend five: BMO Canadian Equity ETF, CIBC Canadian Index Fund, RBC Canadian Index Fund, Scotia Canadian Index Fund and TD Canadian Index Fund).
If you have more time to review your investments, you can open a self-directed RRSP, which allows you to hold different types of investments. You can certainly manage the account yourself, but you are not obliged to do so: many people have a financial advisor handle their self-directed RRSPs. Most self-directed RRSPs have an annual trustee fee, which you pay in addition to trading costs, management fees and other charges. The trustee fee may range from $25 to $250 depending on the size of the account and the financial institution. This fee is typically waived on accounts with a value greater than $25,000.
The third way to invest in an RRSP is the one that is generally considered the least effective. Investors are often warned not to wait until the contribution deadline looms in February to rush money into an RRSP. If you contribute earlier and on a regular basis, you have more tax-free returns accumulating over the year.
Still, if you have money to invest, there is nothing wrong with tucking it into your RRSP before the end of February if you have unused contribution room.
What does it mean to make a “double” profit with RRSPs?
You might think of investment gains in an RRSP as a double profit. Instead of paying up to, say, 50% of your profit to the government in taxes and keeping 50% to work for you, you keep 100% of your profit working for you, until you take it out.
If you lose money in an RRSP, however, you have a double loss. You lose your money, and you lose the opportunity to have that money grow in a tax-deferred environment for years, if not decades, until you take it out.
That’s why successful investors put only their safest investments in RRSPs. If they indulge in penny stocks, stock options or short-term trading, they do so outside their RRSPs. That way, they avoid the double loss. And they can use any losses they do suffer to offset taxable capital gains.
One of the most common questions we get is, “how much can I contribute to a RRSP?” and I hope we answered that. Do you have other questions about investing in RRSPs? Leave a comment below.
Comments
Bill
RRSPs for someone who has a pension plan is NOT a good idea; these people should invest in a TFSA to the maximum possible AND use an independent advisor NOT a bank advisor. They should NOT invest all this money in ETFs, which only mimic the various indices and NEVER beat the index , because of their fees, even as small as they can be ; some of their investments should be in actively managed mutual funds which sometimes DO BEAT the index but sometimes do not; this way they play both sides of the coin and can achieve better overall results over time than if all of their investments were in ETFs
You touched on it mildly but if you start young and invest in blue chip stocks and reinvest each year than with the power of compounding you could have a very large sum when you have to convert it to a RRIF. Say you were astute and had a million in the account than when the government made the first withdrawal from the account it would be close to $50,000.00 which would be classed as interest so it would be fully taxable. While the money is in the RRSP you cant touch it but you can invest it. Personally I like to be able to handle my money that I worked hard for. I have a small one and that is because I started in ’88 and was laid off in January of ’92 so after that it didn’t make any sense to invest in it because it would have been interest income but it has grown just the same. Better to invest in a TFSA or non registered account and have the joy of buying and selling or holding your own stocks and pay the tax as you go even if you complain about it once in a while. As you stated it is tax deferred and the tax has to be paid eventually. I have heard people say yes but look how much I saved all these years but when the time comes some wish they didn’t save so much. Everyone wants more money but they don’t want to pay the taxes.
Thanks, Ronald. It’s always good to hear the investing experiences of our readers. We still believe that RRSPs and TFSAs have a role to play in the investment strategies of most Canadians at various stages.
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RRSPs for someone who has a pension plan is NOT a good idea; these people should invest in a TFSA to the maximum possible AND use an independent advisor NOT a bank advisor. They should NOT invest all this money in ETFs, which only mimic the various indices and NEVER beat the index , because of their fees, even as small as they can be ; some of their investments should be in actively managed mutual funds which sometimes DO BEAT the index but sometimes do not; this way they play both sides of the coin and can achieve better overall results over time than if all of their investments were in ETFs
You touched on it mildly but if you start young and invest in blue chip stocks and reinvest each year than with the power of compounding you could have a very large sum when you have to convert it to a RRIF. Say you were astute and had a million in the account than when the government made the first withdrawal from the account it would be close to $50,000.00 which would be classed as interest so it would be fully taxable. While the money is in the RRSP you cant touch it but you can invest it. Personally I like to be able to handle my money that I worked hard for. I have a small one and that is because I started in ’88 and was laid off in January of ’92 so after that it didn’t make any sense to invest in it because it would have been interest income but it has grown just the same. Better to invest in a TFSA or non registered account and have the joy of buying and selling or holding your own stocks and pay the tax as you go even if you complain about it once in a while. As you stated it is tax deferred and the tax has to be paid eventually. I have heard people say yes but look how much I saved all these years but when the time comes some wish they didn’t save so much. Everyone wants more money but they don’t want to pay the taxes.
Thanks, Ronald. It’s always good to hear the investing experiences of our readers. We still believe that RRSPs and TFSAs have a role to play in the investment strategies of most Canadians at various stages.