RRSP Pros and Cons: Guide for Employees in Canada

RRSP Pros and Cons: Guide for Employees in Canada

RRSPs are one of the best options for Canadians looking to invest in their future. However, just like any other retirement savings plan, it’s vital to understand the RRSP pros and cons before deciding if it’s the right option for your financial situation. 

Table of Contents

What is an RRSP?

A Registered Retirement Savings Plan, or RRSP, is a tax-advantaged account set up by the Canadian government to encourage people to save for retirement.

The main benefit of the RRSP is that it allows you to defer taxes until you withdraw your retirement savings from the RRSP. Any contributions to the plan don’t count towards your income for the year, allowing you to pay less tax now while investing in the future.

In addition to cash, you can also hold a wide range of other assets in your RRSP, including:

  •       Stocks traded on a major exchange
  •       Corporate and government bonds
  •       Mortgages
  •       Mortgage-backed securities
  •       Gold and silver
  •       Mutual funds
  •       Exchange-traded funds
  •       Shares in Canadian small businesses, excluding your own private business or any business in which you own over 10% of the total share
  •       Guaranteed investment certificates

Any investments you make in the RRSP receive a tax exemption, as long as funds remain within the plan. This makes an RRSP an appealing investment tool that can help you maximize the gains from any investments you make.

Group vs. Individual RRSPs

Contribution Limits of an RRSP

Unfortunately, since RRSPs are registered plans, they limit annual contributions to reign in excess contributions. This limit is either 18% of the past year’s income or an annual amount set by the Canadian Revenue Agency (CRA), whichever is smaller.

The CRA evaluates its maximum limit annually, and you can find this year’s contribution limit on its website.

Receiving Income from an RRSP

An RRSP matures when the holder turns 71. In that year, you’ll have to decide whether you want to withdraw the funds, transfer them to a registered retirement income fund (RRIF), or purchase an annuity.

Any withdrawals from an RRSP count as income and are subject to income tax. If you’ve transferred your RRSP to an RRIF, you’ll have to pay income tax on the payments you receive from the RRIF, and the same applies to any annuities you purchased with your RRSP funds.

In general, the income tax varies depending on whether you withdraw the funds before or after you turn 71. You can expect to pay a much higher income tax rate on early withdrawals, as well as an additional withholding tax. If you withdraw your funds when the RRSP matures, you’ll still have to pay income tax, but at a lower rate.

Home Buyer’s and Lifelong Learning RRSP Plans

Transferring RRSPs

In general, you can’t transfer your RRSP to another person as long as you’re alive. You can open a joint RRSP with a spouse or common-law partner but not with anyone else.

If you die, your RRSP funds will go to a chosen beneficiary on a tax-deferred basis. While the beneficiary will not pay income tax on receiving these funds, they will pay tax when withdrawing them.

RRSP Pros and Cons

Let’s examine the benefits and drawbacks of RRSP plans to help you make the best choice for your retirement planning.

Benefits of an RRSP

RRSP Drawbacks

The Difference Between a TFSA and RRSP

A popular alternative to the RRSP is the tax-free savings account or TFSA. The TFSA is similar to the RRSP in that contributions can include assets such as stocks and investments. TFSAs are life-long and don’t have early withdrawal penalties, whereas an RRSP expires when you turn 71 and has some hefty earthly withdrawal fees. 

The main advantage of the RRSP is the tax-deferral. Since any RRSP contribution doesn’t contribute to your income tax for the year, it means that you can save money through your tax return. The TFSA doesn’t offer this tax-deferral functionality. Instead, it relies on granting tax-free growth throughout the life of the account.

A TFSA has a much lower contribution limit of $6,000 per year, but the plan does allow you to take advantage of missed years with additional contribution room. The RRSP, on the other hand, has a much higher annual contribution limit without the opportunity to make up for lost years.

TFSA vs. RRSP: Which Is Better?


Is an RRSP The Right Move for You?

The Canadian government explicitly designed RRSPs to help people save up for retirement. As long as you keep their use in mind, they’re the ideal tool for the job.

In general, GRRSPs are the superior option since they allow employers to contribute as well. To help you find the ideal GRRSP provider, consider using a service like Group Enroll. We help employers find the ideal group RRSP and DPSP providers to suit their needs, considering the RRSP pros and cons for your business.

Simply request a quote using our online system. Our service team will get quotes from multiple providers, and we’ll help you choose the best proposal for your needs. You can also get in touch via email at hello@groupenroll.ca or visit our offices at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K, 5W1. We look forward to helping you find the best GRRSP provider for your needs!