Taxes & Retirement Savings: It's Simpler than It Looks!

The tax system lets you accumulate a certain amount of savings tax free, until you withdraw the funds for use. Deferring taxes this way helps your capital grow faster. For retirement, it's possible with...

  • Supplemental pension plans (SPPs)
  • Deferred profit sharing plans (DPSPs)
  • Voluntary Retirement Savings Plan (VRSPs)
  • Registered retirement savings plans (RRPSs)

The retirement savings provisions in the Income Tax Act (ITA) are based on the principle that taxpayers with the same incomes should be eligible for the same tax breaks, whether they contribute to a defined contribution pension plan, defined benefit pension plan, an RRSP, a DPSP, a VRSP or a combination thereof.

The following table shows the new maximums referred to in this capsule.

Contribution limit1

Year Defined
Benefit (DB) Plan2
(DC) Plan
2024$3506.67$32 490$31 560$16 245
 and later
Indexed (1/9 of
the DC limit)
$32 490 (DC limit
of the previous year)
Indexed (50% of the DC limit)

(1) Contribution limits include both employer and employee contributions.

(2) The contribution limit for DB plans is in pension credits, which means that the method used to calculate it differs from the one that applies to defined contribution plans. However, both methods are more or less equivalent.

Pension credits represent the value of a benefit acquired under either a deferred profit sharing plan or the DC plan or defined benefit plan of a pension fund (SPP). The total of an employee's pension credits is his or her pension adjustment (PA).

Pension adjustment

  • The pension adjustment (PA) concerns SPPs. It is the total amount of a plan member's pension credits, calculated according to the contributions made or the benefits received during the year.
  • It determines how much an individual can contribute to an RRSP after contributing to an SPP.

    If an individual has an RRSP contribution limit of $31 560, the PA for his or her SPP is $1200, and he or she contributes $10 000 to a DPSP, the maximum contribution room for his or her RRSP will be $19 580 [$31 560 − ($1200 + $10 000)].

Other tax credits can also apply in retirement:

  • Federal family caregiver amount
  • Provincial tax credit for home-support services for seniors
  • Pension income tax credit
  • Age amount (age 65 and over)

Since the 2007 tax year, up to 50% of a person's pension income can be split between spouses. The tax rules vary depending on the source of the income (e.g., SPP or RRIF) and age. Income that qualifies for splitting is income that gives entitlement to the tax credit for pension income.

Tax-free savings accounts

The tax-free savings account (TFSA), available as of 2009, is a registered savings plan that allows you to save money in the short, medium or long term. The TFSA's tax advantages are equally as enticing as those offered with retirement savings plans, if you use your TFSA to save for retirement.

Contributions to a TFSA are not tax deductible, but interest generated in a TFSA accumulates tax free and amounts withdrawn are not taxable. You can compare the advantages of the TFSA with those of other retirement savings vehicles.

Supplemental pension plans: Benefits are taxable

In an SPP, the money generated by your investment is not taxed as it accumulates. However, any benefits you receive are taxable at the time you receive them.

  • Defined benefit plans

    Since 1991, limits have been in place to prevent overly generous benefits. A pension adjustment is also calculated to reflect the value of the savings accumulated. Two other adjustments also apply:

    • Past service pension adjustment (PSPA): when the contributor buys back past periods of service or increases contribution levels for services provided after 1989.
    • Pension adjustment reversal (PAR): when the contributor stops working while the benefits due are less than the PA for the period in question. You don't have to declare a PAR if you retire and begin drawing a monthly pension from your plan.
    • The PA and PSPA lower your RRSP contribution limit, while the PAR raises it.
  • Defined contribution plans

The limit on total contributions by the employer and employee is $32 490 for 2024 A PA applies, but not a PSPA or PAR.

Deferred profit sharing plans

Some employers have policies on contribution limits, but the decision usually falls to the employee. The amount of contributions is matched by a PA and cannot exceed $16 245 in 2024.

Voluntary Retirement Savings Plan

A VRSP is a group retirement savings plan offered by an employer and managed by an authorized administrator. Employers who meet certain requirements will be required to offer a VRSP to their employees. An employee can opt out of the plan if he or she so desires.

The total amount the employer and employee can contribute is $31 560 in 2024.

Registered retirement savings plans

RRSPs are a way to save for retirement and defer taxes until you retire (deductible contributions and non-taxable returns).The limit for 2024 is 18% of the income you earned in 2023 up to a maximum of $31 560. The PA for 2023 is deducted from this amount. Any contribution room you don't use accumulates.

Tax on investment returns

Taxes on investment returns depend on the nature of the returns. In 2024, the maximum tax rates are as follows:

  • 53.31% on regular income (interest, salary, withdrawals from an RRSP, SPP, locked-in retirement account (LIRA), life income fund (LIF), etc.)
  • 48.70% on dividend income
  • 26.65% (half of the regular income) on capital gains

While 50% of capital gains are taxed in the year they are earned, 50% of a capital loss can only be claimed against taxable capital gains earned in the same year or one of the 3 previous years. However, a capital loss can be deferred indefinitely and deducted from taxable capital gains in the future.

When you make a withdrawal from your RRSP, the entire amount is taxed as normal income. Amounts withdrawn are not treated as investment income in registered plans, so there are no capital gains or dividends.

Advantages of RRSPs

You'll have more money to invest if you contribute to an RRSP because the tax deduction it qualifies you for will put more money in your hands.

The table below compares the performance of $1000 invested in an RRSP versus a non-RRSP, non-TFSA investment of the same amount. Within an RRSP, this sample investment generates a $667 tax refund.

If you invest this $667 in your RRSP, your total investment jumps to $1667. Since the investment grows tax free, the net rate of return equals the gross rate. (For an investment outside an RRSP, you would have to subtract the tax rate, which in this case is 2.40%).

If you invest $1000 a year in an RRSP for 30 years and are taxed at 40%, your net gain will be $2854 ($5743 − $2889) higher than if you had invested the same amount using a non-RRSP investment vehicle.

Non-RRSP and
Tax refund0$667
Net money out$1000$1000
Net return3.60%6.00%
Accumulated balance$2889$9572

Consult the information capsule on TFSAs for a comparison of TFSA and RRSP contributions.

Important Considerations

  • Since returns are not taxed annually, you're able to save a higher amount. As shown in the example above, if you invest $1000, are taxed at 40%, and earn 6% in returns, your balance after 30 years will be much higher if you invest the money in an RRSP.
  • Since your tax rate in retirement will probably be lower than when you contribute to your plan, this approach not only defers taxes, but also reduces your average tax rate.
  • Investors should use their unregistered savings to max out their RRSPs to avoid annual taxes on their returns. This optimizes return on investment by spreading the deduction out over a number of years, rather than all in a single year.
  • If you've maxed out your RRSPs and accumulated additional unregistered savings, you can improve your net performance by concentrating the "shares" component of your portfolio outside your RRSPs.
  • Even if you invest 100% in shares that generate a capital gain, your investments will typically grow faster if they're in an RRSP.

RRSPs: What to watch out for

  • When you make withdrawals from an RRSP, amounts invested and their accumulated interest are taxed just like regular income. That means you won't have the benefit of a lower retirement tax rate for dividends and capital gains generated within an RRSP. However, RRSPs are still the best investment.
  • Saving in an RRSP is not necessarily the answer for low-income workers. When they retire and withdraw their savings, the combination of the tax rate and the clawback of the Guaranteed Income Supplement may produce a higher tax rate than when they were employed. A TFSA will be a more effective tool for them. The public pension system should adequately support low-income workers in retirement in relation to their previous employment income.