We Asked An Accountant What The Heck An RRSP Is & If Young Quebecers Should Get One

What the heck is an RRSP?

An RRSP is an investment account registered with the Canada Revenue Agency (CRA) that you can contribute to each year in order to save for retirement.

But there are advantages beyond just setting yourself up for the future.

The federal government created RRSPs to provide tax benefits to those who have them, as a way to motivate Canadians to put money away for retirement.

What's all the hype about?

The beauty of an RRSP is that it's a tax-advantaged account. 

What does that mean? Not only is the money you put in your RRSP account sheltered from taxes until it's withdrawn, but the amount you contribute can be deducted from your taxable income so it lowers your income tax on any given tax year.

"If you choose to invest in RRSPs, there's a direct impact [on the] income that's declared on your tax return," Watkin tells MTL Blog.

"RRSPs are a tax deduction, which means they come off of your income before taxes are calculated."

In other words, if you make $45,000 a year and contribute $5,000 to your RRSP, then you'd only need to pay income tax on $40,000 for the year of the contribution. 

Should young people get RRSPs?  

Watkin isn't a financial planner and she isn't familiar with each young person's unique financial situation, so she couldn't directly answer this question. 

The bottom line is that it depends on your personal finances.

But Western Financial Group says "the longer your money stays in your RRSP, the more time it has to grow - which is why it’s better to open an RRSP at a younger age."

According to personal finance blogger Enoch Omololu, "the best RRSP savings accounts offer high-interest rates that are well above average," meaning you can grow your money tax-free until it's time to withdraw.  

What are RRSP limits?  

There are limits to how much you can contribute to your RRSP each year and how much you can deduct from your income tax based on your RRSP contribution.

Your contribution limit is unique to you and can be found on your CRA account.

The limit changes based on your unused contributions from previous years and the tax year's deduction limit.

For the 2020 tax year, the RRSP deduction limit was 18% of a taxpayer’s pre-tax income or $27,230 — whichever was less.

For example, if you earned $45,000 in 2020, your RRSP deduction limit for that tax year was 18% of that, or $8,100.

If you decided to contribute just $5,000, then you can carry forward $3,100 and add it to your limit for 2021 — so you'll be able to contribute and deduct more the next year.

"If you can't contribute this year ... you don't lose that contribution room, it just rolls over into the next year," Watkin says.

"Maybe you're already getting a refund or something on your tax return, then you don't necessarily need to [contribute]."

More information on RRSP contributions is available on the CRA's website.

What if I go over the limit?

Watkin says the government imposes penalties for over-contributing to RRSPs.

Excess contributions up to $2,000 will be forgiven, but won't be considered tax-deductible.

If you go over the limit by more than $2,000, the CRA will mail you a notice encouraging you to withdraw the excess amount.

Should you fail to do so, you'll likely need to pay the CRA a monthly 1% tax on the amount you over-contributed.

How long do I have to contribute to RRSPs?

The RRSP contribution age limit is 71, according to the CRA website.

You can contribute to RRSPs until December 31 of the year you turn 71.

Keep an eye out for annual contribution deadlines — it's typically within the first couple of days of March.

How do I contribute to RRSPs?

Contact your bank to set-up an RRSP. They'll explain how the process works.

You should report your RRSP contributions on line 208 of your T1 General Income Tax Return.

Your preferred financial institution will provide you with RRSP receipts.