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Ben Felix - How the RRSP Works

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Author: Ben Felix
Categories: Personal Finance
Tags: finance
Views: 2 · Last viewed: 2026-10-16 09:33 UTC

Short Summary

Main recommendation: Max out your RRSP (registered retirement savings plan) contribution room, leave the money invested for long-term growth, and avoid early withdrawals, including the Home Buyers' Plan and Lifelong Learning Plan, unless necessary. The RRSP is an account, not an investment, and its main benefits are tax-deferred contributions and tax-free investment growth. Whether it beats a TFSA depends on whether your tax rate is higher now than it will be in retirement.

Key Points

  • Your RRSP room grows each year by 18% of prior-year earned income, up to an annual maximum; in 2019 that maximum was $26,500, and everyone gets $2,000 of over-contribution room on top.
  • Contributions within your limit are deductible from taxable income in the current year or a future year, and you can defer deductions if you expect higher tax brackets later.
  • The RRSP only defers tax: withdrawals are taxable, and by age 71 the account must convert to a RRIF with minimum annual withdrawals.
  • The RRSP tends to beat the TFSA when your tax rate during working years is higher than in retirement, which is typical for most people; pension holders often have lower future tax rates too, since pensions typically replace no more than about 70% of working income.
  • Early withdrawals carry no explicit penalty but an implicit one: the withdrawn contribution room is lost permanently, unlike a TFSA.

Details Worth Noting

  • Concrete instructions: Calculate your RRSP room by taking 18% of prior-year earned income (employment income, net self-employment income, or net rental income), capped at the annual maximum. Make contributions within the first 60 days of the following calendar year to deduct them for the prior tax year (e.g., contributions by March 1, 2019 for the 2018 tax year). If you expect higher income in a higher bracket next year, consider deferring some deductions. Consider holding U.S.-listed stocks or U.S.-listed ETFs in the RRSP to avoid the 15% U.S. dividend withholding tax, and avoid holding Canadian-listed ETFs that hold U.S.-listed international or emerging market ETFs there, since that stacks two layers of withholding tax. Use asset allocation ETFs like VGRO or XGRO in the RRSP if you want to avoid the pre- versus after-tax allocation issue. Avoid holding individual stocks in the RRSP.
  • Home Buyers' Plan: first-time buyers can withdraw up to $25,000 and must repay over 15 years starting the second year after withdrawal; missed repayments are taxed as income.
  • Lifelong Learning Plan: up to $10,000 per year, $20,000 total, repaid over 10 years, for education costs.
  • Withholding tax on withdrawals is at most 30% (31% in Quebec), and is not a penalty; the difference from your actual rate is settled at tax filing.
  • OAS clawback can raise your effective tax rate by about 15% if pension income after splitting is high enough, which can erode the RRSP's advantage for pension holders.
  • Example from the video: $1.00 in an RRSP versus $0.70 in a TFSA, growing at 5% for 20 years, with the RRSP reaching $2.65 and the TFSA reaching $1.86 pre-withdrawal-tax; after applying the same 30% tax rate to the RRSP withdrawal, both end up equal at $1.86.

Bottom Line

The RRSP is worth using mainly because it lets you defer tax from high-income years and grow investments tax-free, but the benefit depends on your expected tax rate in retirement. Protect your contribution room by avoiding early withdrawals.