The mad rush to make this year’s registered retirement savings plan (RRSP) contribution should be a little less hectic thanks to a quirk in the calendar.
Since the usual March 1 deadline falls on a Saturday, plan holders have until Midnight on March 3 to patch together whatever they can.
RRSP contributions can be made any time, but the deadline applies to plan holders who want to deduct the contribution amount from their 2024 taxable income.
It’s not hard to see why RRSPs have been the favourite tax-saving investment vehicle for Canadians since 1957. They allow investments to grow tax-free over time to a day when the tax sting is less.
How RRSPs work
RRSP accounts can be set up through just about any financial institution.
Contributions can be deducted from taxable income in any calendar year going forward.
Those contributions can be invested in just about anything; stocks, bonds, mutual funds, exchange traded funds (ETFs), etc. You can even keep them in cash.
Those investments can compound and grow tax-free for decades until they are withdrawn when they are fully taxed – ideally at a low marginal tax rate in retirement.
The RRSP contribution limit for 2025 is 18 per cent of reported earned income in 2024 to a maximum of $32,490. Unused contribution space can be carried forward to future years.
The Canada Revenue Agency (CRA) keeps track and lists remaining contribution space on each year’s tax statement for individuals.
Strategy for bigger tax savings
Canadians love their RRSPs because contributions made before the deadline almost always result in lower tax bills in the spring. In cases where an employer makes payroll deductions throughout the year, it usually results in a refund.
The size of the refund depends on how much taxable income you generate the year it is claimed, and your marginal tax rate as a result.
Here’s a simplified example: If you live in Ontario and earn less than $55,000, your combined federal/provincial tax rate is about 15 per cent. That means an RRSP contribution of $10,000 would lower your tax bill by 15 per cent, or $1,500.
If you live in Ontario and earn over $250,000, your combined tax rate could top 50 per cent. A $10,000 RRSP contribution at that marginal rate would generate a 50 per cent refund, or $5,000.
If it seems like RRSPs favour the rich, you’re right. Tax savings for lower income Canadians are much smaller than those with higher incomes. One strategy that could level the playing field a bit is to make contributions when you can but only claim them in high income years.
RRSP strings attached
That means if you contribute to your RRSP at the lowest marginal rate, the best you can hope for is to withdraw savings at the lowest marginal tax rate in retirement. In that case the only real advantage to an RRSP is tax-free growth over time.
If you contribute a lot and invest well, and your RRSP savings grow above expectations, that’s a good thing, but it could put you at a higher marginal rate than your original contribution when it comes time to make withdrawals.
When you reach 71 years of age, Ottawa will impose minimum RRSP withdrawals, which could also result in Old Age Security (OAS) clawbacks if they reach a certain threshold.
If you make an early withdrawal while you are still working, the amount you remove from the plan will be taxed at whatever rate you are paying that year. If you are already taxed at a high marginal rate, the amount you withdraw could push you into an even higher tax bracket.
Early withdrawals could make sense if your income has been seriously reduced but you will lose that allowable contribution space forever.
Ottawa also allows tax-free withdrawals for continuing education or to buy a first home, as long as the money is returned to your RRSP within a certain period of time.
