Most newcomers choose to settle in Canada because they want a better life for themselves and their family. This long-term goal requires long-term financial planning. While in the short term you may need to address your immediate financial needs, you shouldn’t lose sight of your long-term financial needs, including retirement. In Canada, government investment accounts like the Registered Retirement Savings Plan (RRSP) offer tax benefits on contributions to help you save both now and in the future.
TLDR
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RRSPs allow newcomers to Canada to save for retirement with contributions that are tax-deductible and investment earnings that grow tax-deferred until withdrawal (usually in retirement, when you are in a lower tax bracket).
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After you have filed taxes in Canada for the first time, you can contribute up to 18% of your annual income (up to the annual limit), with unused contribution from past years carrying forward for future years.
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You can borrow funds from your RRSP to pay for education or to buy a home without penalty, provided you repay the funds within the required time period.
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RRSPs differ from TFSAs in terms of contribution timing and withdrawal flexibility.
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RRSPs remain beneficial even if you don’t retire in Canada, though withdrawals as a non-resident are subject to withholding taxes.
What is a Registered Retirement Savings Plan (RRSP)?
An RRSP is a savings plan that allows you to save a portion of your income for retirement. Unlike regular savings plans, the Registered Retirement Savings Plan is registered by the government and offers certain tax advantages, which make it a popular investment choice among Canadians.
How do RRSP tax benefits work
To encourage people to save more, the government offers two key tax benefits on your RRSP contributions:
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RRSP contributions are tax-deductible, up to a certain limit. You can deduct your annual RRSP contribution from your taxable income and reduce your tax liability for the year or get a tax refund. This effectively means that you contribute to RRSP from your pre-tax income.
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Income earned on your RRSP is tax-deferred. This means you don’t need to pay income tax on capital gains or dividends until you start withdrawing funds or receiving income from your RRSP. Both your contributions and earnings will be taxed at the time of withdrawal, but, since you’ll likely be in a lower tax bracket after retirement, you will likely have to pay less tax on your RRSP earnings.
To encourage people to save more, the government offers two key tax benefits on your RRSP contributions:
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Cash
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Bonds, including government and corporate bonds
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Canadian and foreign stocks (or equities)
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Treasury bills
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Gold and silver bars
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Mortgage-backed securities
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Income trusts
The investments you can make depend on the type of RRSP account you have, so be sure to speak to a financial advisor for guidance on the ideal RRSP account for your needs.
Can newcomers to Canada open and contribute to an RRSP?
To be eligible to open an RRSP in Canada, you must:
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Be a tax resident and file income tax in Canada. In addition to Canadian citizens and permanent residents, temporary foreign workers and international students living in Canada may qualify as tax residents if they were in Canada for at least 183 days during the year.
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Have an income.
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Be 71 years of age or younger. There is no minimum age requirement.
You can typically contribute to your RRSP until December 31st of the year in which you turn 71. However, there’s a maximum limit to how much you can contribute in a particular year, so you must have RRSP deduction room available.
In addition to your own RRSP, you can also use your contribution room to contribute to a spousal RRSP until December 31st of the year in which they turn 71 years of age.
When can newcomers to Canada start contributing to an RRSP?
As a newcomer, you’re only able to contribute to an RRSP after you file your first income tax return in Canada. This means you won’t be able to contribute the year you arrive.
Once you file your first tax return, the Canada Revenue Agency (CRA) will provide you with a Notice of Assessment, which will specify how much you’re allowed to contribute to the RRSP based on your prior year’s income.
What is RRSP contribution room?
RRSP contribution room, also known as the RRSP deduction limit, is the maximum amount you’re allowed to contribute to your RRSP and deduct on your tax return each year, and it is different for everyone. After you file your income taxes, you will receive a notice of assessment from the CRA with information on your deduction limit for the next financial year.
How much can I contribute to RRSP?
According to the CRA, your contribution room is 18 per cent of your gross income in a particular year, up to a maximum annual limit. For 2024, the RRSP annual limit was $31,560 CAD.
It’s also important to note that the RRSP deduction limit is cumulative, so any unused contribution room carries over to the next year.
Log on to your CRA account on the secure CRA portal to find out what your deduction limit is.
What happens if you contribute more than your RRSP deduction limit?
There are penalties for exceeding the RRSP deduction limit, so make sure you don’t over-contribute to your RRSP. Usually, if you go over the deduction limit by $2,000 or more, you’ll need to pay 1 per cent tax on the excess contribution each month, unless you withdraw the extra amount.
While calculating how much you’ve contributed to your RRSP in a single year, you should also take into account your employer’s contribution (such as to pooled registered pension plans) and your contributions to your spouse’s RRSP.
Tip: If you accidentally made an excess contribution and are taking steps to rectify the situation, you can make a written request to the CRA to ask them to consider cancelling the punitive tax.
How to set up an RRSP
You can open a Registered Retirement Savings Plan account with a Canadian bank, credit union, insurance company, or trust. Financial institutions like the Royal Bank of Canada (RBC) offer different types of RRSPs, including ones you can trade in yourself and ones fully managed for you by a portfolio manager. You can speak to a newcomer financial advisor for information on the types of RRSPs available and the investments you can keep in them.
Your employer may also enrol you in a group RRSP or a Pooled Retirement Pension Plan (PRPP) as part of your benefits package. In this case, the employer will set up an account with a financial institution and make payroll deductions for your share of contributions. Some employers also fully or partially match employee contributions to the PRPP.
Note: You can only deduct your own PRPP contributions on your income tax return. Contributions made by your employer are not tax-deductible.
What is the deadline for RRSP contributions?
RRSP contributions for a given year must be made by the beginning of March of the following year. For instance, for 2025, you can contribute to your RRSP within the limit indicated in your 2024 notice of assessment between March 1, 2024, and March 3, 2025.
Withdrawing from your RRSP before retirement
While the RRSP is a retirement savings plan, you can withdraw funds from it earlier if you are not in a locked-in plan. However, in most cases, the money you withdraw is subject to a withholding tax of between 10 and 30 per cent, depending on the amount you withdraw. You will also need to include this as ‘income’ in your tax return. However, if you’re withdrawing money through the Home Buyers’ Plan (HBP) or Lifelong Learning Plan within your RRSP, you don’t have to pay tax on the withdrawal.
What is the Home Buyer’s Plan (HBP)?
The Home Buyers’ Plan allows you to withdraw up to $60,000 from your RRSP to buy or build a home. You’ll need to repay the amount to your RRSP within 15 years.
As a newcomer, if you plan to buy your first home in Canada, the Home Buyer’s Plan is a great way to fully or partially fund your down payment. You can even use the HBP to make a larger down payment and reduce your mortgage amount.
You may qualify for the HBP if you meet all of the following criteria:
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You’re a first-time home buyer.
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You have a written agreement to buy or build a home for yourself or a family member with a disability.
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You’re a resident of Canada when you make the withdrawal and when you buy or build the home.
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The home will be your principal residence (or that of the disabled family member) within one year of purchase or construction.
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The funds you intend to withdraw have been in your RRSP for at least 90 days.
When you withdraw funds under the Home Buyer’s Plan, the CRA will send you an HBP Statement of Accounts listing the amount you need to repay the following year. Typically, your repayments will be split equally across the 15-year repayment period, so if you withdraw $60,000 under the HBP, you’ll have to repay $4,000 per year. If you pay less than the required amount in a given year, you’ll have to declare the difference as ‘income’ and pay tax on it.
Note that if you are saving for the future and plan to buy your first home in Canada, you can also open a First Home Savings Account in addition to your RRSP, to invest and grow your savings for a down payment on a home.
What is the Lifelong Learning Plan (LLP)?
The Lifelong Learning Plan may be beneficial if you (or your spouse) plan to pursue further education in Canada.
The LLP allows you to withdraw up to $10,000 per year from your RRSP to fund full-time education or training for yourself, or your spouse or common-law partner. You need to repay the amount you withdraw within 10 years.
To qualify for the LLP, you must:
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Be a tax resident of Canada.
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Be enrolled or have received an offer to enrol as a full-time student in a qualifying study program at a designated learning institution (DLI) before March of next year.
If you become a non-resident of Canada for tax purposes after making an LLP withdrawal, you need to include the remaining LLP balance in your tax return and pay income tax on it.
Note: You cannot use the LLP to finance your children’s education. Read our article on Registered Education Savings Plans (RESPs) for more information on saving for your children’s education.
Withdrawing money or receiving income from your RRSP at the time of retirement
When you retire, you can withdraw the funds in your RRSP as a lump sum or in the form of regular income. You can choose to start these withdrawals or payments as early as you want, but since the withdrawals from your RRSP count as income, you will have to pay taxes on them. Usually, after retirement, RRSP holders find themselves in a lower tax bracket, and as such, pay less tax on their RRSP withdrawals than they would have when they were earning a salary.
The year you turn 71 years of age, you’ll have the option to withdraw all funds and close the account; transfer your RRSP to a Registered Retirement Income Fund (RRIF); or use the funds to purchase an annuity.
Withdrawing funds from your RRSP
You can withdraw funds from your RRSP before or after retirement, until you turn 71 years of age. However, your financial institution is required to withhold tax from your withdrawals and you’ll need to declare the amounts as income on your tax return.
Registered Retirement Income Fund (RRIF)
After you retire, your bank or financial institution can transfer your RRSP assets to a Registered Retirement Income Fund. Once you set up an RRIF, you can no longer contribute to your RRSP, and the RRIF cannot be terminated except in the event of your death.
Receiving income from your RRIF
From the year your RRIF is set up, you will receive a minimum yearly payment from it for your entire life. This minimum amount will be determined by your financial institution, depending on your age, the balance in your RRIF account, and the expected rate of return. You can choose to withdraw more than the minimum amount. The income you receive from RRIF is taxable, so you need to declare it in your tax return and pay tax on it each year. Upon the death of an RRIP holder, the remaining amount can be transferred to the RRSP, RRIF, PRPP or annuity account of an eligible beneficiary.
Using RRSP funds to purchase an annuity
An annuity is a financial product that guarantees an income for a certain term or for life. Depending on the product you choose, you may receive a fixed or variable payment throughout your term, or for the rest of your life. With some types of annuities, you may also have the option to continue your annuity to support your spouse or beneficiary after your death.
Many financial institutions give you the option to transfer your RRSP funds directly to an annuity when or before you turn 71. Your financial institution will not withhold taxes from the RRSP funds being used to purchase an annuity, but you’ll need to pay taxes on the annual income you receive from the annuity.
RRSP versus TFSA: Which is better?
One of the questions newcomers to Canada commonly ask is whether an RRSP is better than a Tax Free Savings Account (TFSA). There are several differences between TFSA and RRSP and each plan has its advantages. However, if you do need to choose between the two, keep the following in mind and select the plan that best fits your specific situation and goals:
| RRSP | TFSA | |
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| Contributing as a newcomer | You can start contributing the year after you arrive, once you’ve filed your first tax return in Canada | You can start contributing the year you arrive in Canada |
| Tax treatment for contributions | Contributions made from pre-tax income (Contributions are tax-deferred or taxable upon withdrawal) | Contributions made from after-tax income |
| Tax treatment for earnings | Taxable on withdrawal | Tax-free withdrawals |
| Contribution limit for 2024 | 18 per cent of income or $31,560, whichever is less (plus unused contribution room from previous years) | $7,000 (plus unused contribution room from previous years) |
| Withdrawal flexibility | Withdrawals are taxable, except for Home Buyer’s Plan or Lifelong Learning Plan, which must be repaid within a specified term | Can withdraw at any time for any purpose |
| Expiry date | Must withdraw or convert into RRIF or annuity the year you turn 71 | No expiration |
Should you invest in an RRSP if you don’t plan to retire in Canada?
If you plan to move abroad or return to your home country before retirement, you can still benefit from the RRSP. You are not required to close your RRSP account if you leave Canada permanently and your savings in the plan can continue to grow.
However, RRSP withdrawals by non-residents are subject to a 25 per cent non-resident withholding tax. Make sure you calculate the projected return on your RRSP savings and factor that into your plans.
Investing in an RRSP is a great way to get a head start on your retirement planning in Canada. Not only will your savings continue to grow till the time you turn 71, but the money you put into the RRSP can significantly lower your tax liability throughout your working life. Moreover, an RRSP offers you the flexibility of borrowing funds for some major life expenses, such as purchasing a home or continuing your education, making it an investment plan of choice for many financially prudent Canadians.
