How RRSPs reduce taxes and grow retirement savings

The Margin Editorial Staff
Mon, 13 Apr 2026 12:49:58 +0000
Retirement-savings-plan, Retirement-savings, Contribution-room, Rrsp-season, Withholding-tax, Home-buyers-plan, Lifelong-learning-plan, Overcontribution, Rrsp

A Registered Retirement Savings Plan (RRSP) is a tax-sheltered account for retirement savings. When you contribute, you reduce your taxable income for that year and pay less tax, while the money grows tax-free inside the account. There's a catch, though: you'll pay tax when you withdraw money from the account, ideally during retirement when you're no longer working and you're in a lower tax bracket.

RRSPs launched in 1957, making them Canada's oldest type of registered account – but that doesn't mean you should max yours out first. If you're early in your career and not earning much yet, contributing to a Tax-Free Savings Account (TFSA) might make more sense for your situation. And if you're saving for a first home, a First Home Savings Account (FHSA) is likely a better option. RRSPs work best when you're in a high tax bracket now but expect to be in a lower one later (like when you're living off CPP and investment income).

​Contribution room

Each year, your RRSP contribution room grows by 18% of your previous year's employment income. For 2026, the maximum is $33,810 (which really only kicks in if you earned $215,611 or more in 2025).

If you earned $50,000 in 2025, you can contribute $9,000 in 2026. Unused room rolls over indefinitely, even if you've never opened an RRSP – so if you're opening one for the first time, you might have years of accumulated room. (You can check your exact limit on your CRA Notice of Assessment.)

When you contribute to your RRSP account, your financial institution issues a tax slip showing the amount. You can use that slip when you file your taxes to claim the deduction and reduce your taxable income for the year.

​What is RRSP season?

RRSP season runs from January 1 to the last day of February. Contributions made during this window can count toward either the previous tax year or the current one.

That flexibility comes in handy if your income varies from year to year. You can wait until you know your full earnings for the previous year, then decide which year's deduction will give you the better tax benefit. Apply it to whichever year you earned more and you'll save more tax.

​Overcontributing to an RRSP

If you contribute more to your account than it has room for, the CRA charges you a 1% penalty per month on the excess until you either withdraw the extra money or build up more contribution room. That's 12% annually if the overcontribution sits there for a full year.

Luckily, the CRA allows a $2,000 buffer in case of miscalculations or mistakes. Go beyond that, though, and the penalty kicks in.

​Withdrawing from an RRSP

RRSPs are meant for retirement, but you can take out money early if you need to. Any amount you withdraw gets added to your taxable income for the year.

Your financial institution has to withhold the tax upfront, similar to how an employer deducts tax from your paycheque. The amount withheld depends on how much you take out:

Withdrawal Amount | Withholding Tax | Withholding Tax (Quebec)
$0 - $5,000 | 10% | 19%
$5,001 - $15,000 | 20% | 24%
$15,001 or greater | 30% | 29%

Come tax time, you might owe more or get a refund, depending on your actual tax bracket versus what was withheld.

​Withdrawing from an RRSP tax-free

There are two programs that'll let you take money out of your RRSP without paying tax immediately: the Home Buyer’s Plan and the Lifelong Learning Plan.

Home Buyer’s Plan (HBP): First-time home buyers can withdraw up to $60,000 to buy a home. No tax is withheld, and the amount isn't added to your income. You'll have to pay it back to your RRSP within 15 years, though, or it'll become taxable income.

Lifelong Learning Plan (LLP): You can withdraw up to $10,000 per year (to a maximum of $20,000 overall) for qualifying educational programs. No tax is withheld, and the amount isn't added to your income. For this one, you'll have to pay it back within 10 years, or else it'll become taxable income.

​What happens at age 71

At some point during the year you turn 71, your RRSP must convert to a Registered Retirement Income Fund (RRIF). Your investments will transfer over automatically.

An RRIF works like an RRSP, except you're required to make minimum withdrawals each year. You can convert it earlier if you want, but not later.

​Summary

An RRSP reduces your taxable income when you contribute and grows tax-free until it's withdrawn. The strategy works best if you're in a high tax bracket now and expect to be in a lower one during retirement.

You can contribute up to 18% of your previous year's income, capped at $33,810 for 2026. Contributions generate a tax slip you'll use to claim the deduction when you file.

Early withdrawals are allowed but get added to your income, and your financial institution withholds tax. There are two exceptions: the Home Buyer's Plan (up to $60,000 for a first home) and the Lifelong Learning Plan (up to $20,000 for education). Both plans require you to pay back the money within 10 to 15 years, or the amount will become taxable.

At 71, your RRSP converts to an RRIF and you'll be required to start making minimum annual withdrawals.