Why Invest Your Savings in an RRSP?

Let's face it: it is not always easy to put money aside. So, when we do manage to save, we like to see our savings grow. When we invest, we earn investment income that adds to our income for the year on which we pay income tax. However, there are types of accounts that allow you to accrue tax-free income. This is what the registered retirement savings plan (RRSP), the tax-free savings account (TFSA) and the first home savings account (FHSA) are made for.

Here, we will take a look at the three main advantages of an RRSP, as well as how it works.

1. Postponing tax on interest and income

If you earn interest or other types of income from your investments in an RRSP, you will not pay income tax on these amounts. However, once you withdraw the amounts, they will be taken into account in the calculation of income tax.

2. Decrease in the income used for income tax

The RRSP allows you to decrease the income on which you pay income tax. This could entitle you to a refund. For example, if your salary is $70 000 per year and you invest $5000 in an RRSP, the income on which you will need to pay income tax will be $65 000 for that year.

When filing your income tax return at the end of the year, you will enter that you contributed to an RRSP. Since you will have paid income tax on your salary of $70 000 during the year, you will receive a refund for the income tax paid on the $5000 you contributed to your RRSP.

The refund varies on the tax deduction rate that applies to the last bracket of income you earn. If you earn $70 000, the rate is around 36% (this is the rate applied to income between $57 375 and $106 494 in 2025). You will receive a refund of around $1800. We obtain $1800 by calculating $5000 × 36%. This is a significant advantage for RRSPs, and it is not the only one.

3. For retirement, the purchase of your first home, or returning to school

The registered retirement savings plan can also be used for purposes other than retirement. Programs are in place so you can use your RRSP to finance the purchase of your first home or condo, or to pay for full-time studies for you or your spouse. There are maximum amounts that must be respected, and then you must return the money to your RRSP before a certain deadline. For more information, consult the Government of Canada's website:

• The Home Buyers' Plan  
• The Lifelong Learning Plan 

However, if you withdraw from your RRSP for something else, you will need to pay income tax on the amount withdrawn. By opening an RRSP, you reduced your taxable income, but by withdrawing from it, you increase that income by the same amount. That is why RRSPs are mainly intended for retirement. When you retire, your income will likely be lower than during your career. Therefore, you will normally pay less income tax. That is when RRSPs become more interesting!

Maximum allowed

Now that you know the advantages of an RRSP, note that there is a maximum amount you can save in this type of account. It is determined based on the income you entered each year on your income tax return. To find out the authorized amount, consult your Notice of Assessment from the Government of Canada. It is a document sent by the Canada Revenue Agency that shows the taxes you must pay or the refund to which you are entitled.

Two other types of account may be useful to you. For more information, consult the advantages of TFSAs and FHSAs.