Person Finance Basics - What Is an RRSP?
What personal finance blog is complete without the classic “What is an RRSP?” post? There are millions of them out there already, so here’s my contribution to the noise except this one is written by me.
What Is an RRSP?
RRSP stands for Registered Retirement Savings Plan. Personally, I think throwing the word “savings” in the name was a mistake, it has nothing to do with a regular savings account. But I’ll give the government a pass because, thankfully, RRSPs have evolved far beyond the piggy-bank image.
TFSAs, however… you still have some image rehabilitation to do (more on that in some other post).
The simplest way to think about RRSPs is this:
- They are a tax-deferral cheat code.
- They are account types, not investments.
- They are containers.
You don’t “buy an RRSP.” You “invest inside an RRSP.”
For the love of everything financially holy, please remind your friends of this the next time someone claims they “bought some RRSP.”
What Does “Just an Account Type” Mean?
Think of your other bank accounts:
- Chequing = everyday money
- Savings = interest-earning cash
- TFSA = tax-free growth
- RRSP = tax-deferred growth
When you go to your bank and say, “I’d like to open an RRSP,” they know exactly what you mean. They’ll set up the account and connect it to your CRA profile so the government knows that money inside this account is sheltered from tax until you withdraw it.
Again: sheltered from tax - not gone, not forgiven, just deferred.
How Does an RRSP Work?
At the most basic level, RRSPs operate on three simple rules:
1. You get annual contribution room
Each year you can contribute the lower of:
- 18% of your previous year’s earned income, or
- The annual cap ($31,560 at the time of writing)
Unused room carries forward forever.
2. Contributions reduce your taxable income
Let’s say:
- You earned $100,000
- Your employer deducted tax based on that full amount
- You contributed $10,000 to your RRSP
When you file your taxes, you claim that $10,000 and your taxable income drops to $90,000.
In Ontario, at the $100K income level, that $10,000 deduction gets you back about $2,965 in taxes (as of writing).
That refund is the tax you are now deferring until retirement.
And please, please reinvest the refund. Don’t blow it on gadgets or a trip to Costco that gets out of hand.
3. Growth inside the account is tax-free
Capital gains? Sheltered.Dividends? Sheltered (with some cross-border caveats). Rebalancing? Sheltered.
You can buy, sell, and reinvest for decades without the annual tax drag.
4. Withdrawals count as taxable income in retirement
Here’s the key benefit:
You contribute while you’re in a high tax bracket…You withdraw while you’re in a low tax bracket.
Example:
- Retirement income from CPP/OAS/etc.: $25,000
- You decide to withdraw $10,000 from your RRSP
- Your total taxable income = $35,000
At that income level in Ontario, you’d owe roughly $2,005 of tax on that withdrawal.
Compare that to the ~$2,965 refund you received when you originally contributed the same amount. That’s a $960 gain, on top of decades of tax-free compounding.
This is the whole point of RRSPs - tax-rate arbitrage.
I Have an RRSP. Now What?
Now you actually need to put investments inside it. Common choices include:
- Stocks
- ETFs
- Mutual funds
- GICs
- Bonds
- Index funds
The RRSP is just the shell. The investments inside it do the work.
A quick caution about foreign holdings
RRSPs are best suited for:
- Canadian equities
- Canadian-listed ETFs
- US equities held through Canadian-listed ETFs (to avoid withholding tax)
Certain U.S. stocks and foreign dividends can trigger withholding taxes if held directly. It’s not complicated, but it’s one of those annoying fine-print items you only learn by making a mistake or doing five minutes of research.
Luckily, companies like BlackRock Canada and Vanguard Canada spell out tax treatment in their ETF descriptions, and their products have served me well for years.
RRSPs suck, RRSPs are useless
OK, let’s address the hate. I am sure you have heard some of these arguments before.
“You pay tax later anyway.”
Response - Yes, and at a lower rate.
This is the entire point. If you’re in the 39 - 42% marginal tax bracket today (for those making over $120,000 at the time of writing this post) and retire in the 20 - 30% bracket (if you are pulling less than $105,000 at the time of this post)? That’s a big tax win on a small income difference. If you are making more than $177,000 now, the difference becomes gigantic.
Imagine “borrowing” from the government at 42% and paying them back at 25%. If a bank offered that deal, people would line up around the block.
“RRSPs lock up your money.”
Response - No, you just shouldn’t treat retirement tools like spending money.
You can withdraw early, you’ll just pay withholding tax plus it goes into your income for the year. It’s not handcuffs. It’s just a bad move. Plus, there are programs under which you can withdraw tax-free as long as you put it back within a certain amount of time. Programs like The Home Buyer’s Plan to buy your first home.
If someone says RRSPs are useless because the money is “locked,” they’re really saying “I want my retirement account to also be my emergency fund.” Those should not be the same thing.
“Just use your TFSA instead.”
Response - TFSA + RRSP is not a rivalry. Use both.
It’s not Coke vs Pepsi. These two serve different tax strategies:
- TFSA: You pay tax now, never again. Perfect for any income level.
- RRSP: You avoid tax now, pay later (ideally less). Best for higher-income years.
If you’re earning $120k–$200k+ - RRSPs are insanely efficient.
If you’re earning $40k - TFSA is usually better.
“The refund isn’t real money.”
Response - The refund is the tool!
This one is my favourite. People say, “The refund is just your own money.” Correct. And that’s the point.
The real play is to invest the refund and multiply the power of your contribution. That’s how you get the compounding advantage. If you spend your refund on a new jacket, yes, your RRSP suddenly looks worse. That's user error. Not the RRSP's fault.
“RRSPs are bad because withdrawals in retirement trigger taxes and clawbacks.”
Response - Only if you contribute without a plan.
If you dump money into an RRSP without thinking about future income, CPP/OAS, pensions, spousal income, etc., sure, you can create clawbacks. You need a drawdown plan to complement your investment strategy (more on that in some other post).
But that’s a planning issue, not an RRSP flaw. This is literally what spreadsheets are for.
And honestly, most people aren’t retiring with such massive taxable income that their RRSP becomes an OAS killer. If that’s your problem, congratulations - you already won the money game.
Final Thoughts
RRSPs aren’t mysterious. They’re not scary. They’re not some government trick. They are one of the most effective tools Canadian professionals have to legally reduce taxes today and grow money faster over the long term.
Use the account correctly, understand the mechanics, reinvest your refund, and Future-You will be very, very grateful.
Also, look at my calculations in this post and see how much money you can accumulate simply by opting in your employer’s GRRSP.
