Three ways you could maximize your RRSP

Updated on July 10, 2024. Originally published November 7, 2022.

What’s the difference between an RRSP and a TFSA?

Registered Retirement Savings Plans (RRSPs) and tax-free savings accounts (TFSAs) can both help you grow your savings, but in a couple of different ways:

1 Contributions to a TFSA can be used for both retirement and shorter-term needs. The money you add to a TFSA isn't tax deductible, but you won’t be taxed when you withdraw the money. 

2 Contributions to an RRSP are generally used for longer-term goals, such as retirement. The money you add to an RRSP is tax deductible. Any contributions to an RRSP and the gains on your investments won’t be taxed until you withdraw the money.

TFSAs can be a good option for saving if you’re in a lower-income bracket, where your income isn’t taxed at a high rate. If you’re in a higher-income bracket, the tax savings an RRSP offers might make it the more desirable choice.

You may want to contribute to both at the same time, or you may want to max out your RRSP first and then save any additional money to your TFSA. It’s up to you.

What are the benefits of an RRSP?

Albert Einstein is said to have called compound interest the eighth wonder of the world—and it’s a primary benefit offered by your RRSP. In addition to delaying the taxes you would normally have to pay, RRSPs can offer some advantages over other savings accounts. 

1 Compounding growth on your contributions

Compound interest means that your money earns money, giving your savings an extra boost. When your RRSP investments earn interest, that interest can earn additional interest, too, and that growth grows, and so on. The longer your money is invested, the more opportunity it and the earnings on it have to grow.

2 Reducing the tax you pay

When you contribute to an RRSP, you reduce the amount of taxes you pay on your annual income. Paying less in taxes today means you could have more money available to contribute to your RRSP.

3 Borrowing toward a home or education

You can use the money in your RRSP to help you buy your first home or to help fund certain education expenses. 

• Under the Home Buyers’ Plan, you can withdraw up to $60,000 without incurring tax if you repay it within a certain period of time. 
• The Lifelong Learning Plan offers the same deal, allowing up to $10,000 in withdrawals per year and $20,000 over time toward your education or that of your spouse/common-law partner.

How to maximize your RRSP savings

To help you get the full retirement savings benefit available through your RRSP, consider these three tips.

1 Take advantage of employer matching

If you have an employer-sponsored RRSP, your employer may match a percentage of the money you contribute. This is a great way to maximize your RRSP because it can really speed up the growth of your savings. Make sure you’re contributing enough to get the full employer matching contribution.

2 Add extra money to your RRSP

Whether it’s your annual bonus, tax refund, or inheritance, if you come into additional money, think about whether you can contribute some (or all) of it to your RRSP. Adding money now can make a big difference later, thanks to the wonder of compounding interest.

3 Increase contributions with salary growth

As your salary grows, so can your RRSP contributions. This can be done easily if you have automatic contributions set up as a percentage of your income—the more you make, the more is automatically added to your RRSP each paycheque. 

Beware: don’t overcontribute!

There's a limit to how much you can contribute to your RRSP each year, and if you don’t contribute up to your limit, you may carry over amounts to the following year’s limit. 

The CRA sets an annual RRSP deduction limit and uses a formula to calculate your personal RRSP deduction limit based on that. 

Generally, the CRA uses your unused deduction room at the end of the preceding year plus the lesser of: 

• 18% of your earned income in the previous year, or 
• the annual RRSP limit set by the CRA plus or minus certain pension adjustments.

You’ll find your personal deduction limit on your notice of assessment or reassessment. You may find these pages on the Canadian government website to be helpful:

• MP, DB, RRSP, DPSP, ALDA, TFSA limits, and the YMPE
  
• Line 20600—Pension adjustment
  
• Pension adjustment reversal  
  
• Past service pension adjustment 
  

If you overcontribute, generally you’ll pay a penalty of 1% per month on excess contributions that exceed your deduction limit by more than $2,000 unless you withdraw the excess amounts or have contributed to a qualifying group plan.