Consider the following example. Say you invest $10,000 in an RSP. If you are a high-income earner, this is roughly equivalent to a $5,000 investment outside of an RSP, due to the tax deduction you receive. After 10 years, your RSP will have grown to $21,589 from $10,000, assuming an 8% annual interest rate of return. Meanwhile, your non-RSP savings will have grown to just $7,401 from $5,000.
To determine the exact RSP tax advantage, you need to convert the RSP to an after-tax value. For this comparison, let’s assume you will withdraw the $21,589 accumulated by the tenth year and pay tax at 50% on this income.
Even if the RSP is actually cashed out in the tenth year, you would still have $3,400 more by investing in your RSP—due to the tax-deferred growth.
The dual tax advantage (8% annual rate of return)
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10 years
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20 years
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30 years
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Outside an RSP $7,401 |
Outside an RSP $10,956 |
Outside an RSP $16,217 |
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Inside an RSP $21,589 |
Inside an RSP $46,610 |
Inside an RSP $100,627 |
Contribute to Your RSP Early and Often
As you can see, it is usually “tax-wise” to maximize your RSP contributions. Here are some strategies to help you make the most of your allowed contributions:
- Use up any unused RSP contribution room from previous years as soon as you can. While unused RSP contribution room continues to build up, the sooner you use it, the sooner you can start benefiting from tax-deferred growth within your RSP.
Remember, you have to use up any unused RSP contribution room by the year in which you or your spouse turns 69. If you don’t have sufficient funds to catch up on unused RSP contribution room right away, consider taking out an RSP loan. Then, you can use the tax savings from the tax deduction, if there is a refund, to help repay the loan.
- Remember to contribute to your RSP even if you are in a pension plan. Although your RSP contribution limit is reduced by a “pension adjustment” from the previous year’s T4 slip, you may still be able to make meaningful contributions depending on your situation.
- The sooner you start contributing to your RSP, the longer you allow your savings to grow on a tax-deferred basis. In fact, if you use an 8% annual compound return rate, your RSP could grow three times larger with exactly the same amount contributed—simply by starting 15 years earlier.
Minimize Taxes with a Spousal RSP
With a spousal RSP, you can lower your tax bill—now and in the future. When you contribute to a spousal RSP, you receive a tax deduction for immediate tax savings. Plus, when properly planned, a spousal RSP helps even out your income with your spouse’s income in retirement. A couple receiving two smaller incomes in retirement, rather than one large income, could drop into lower tax brackets—and therefore pay less tax.
Let Your RSP Grow – Even After Your Retire
You are not required to convert your RSP into a source of retirement income, such as a Retirement Income Fund (RIF), until the year you turn 69. It may be beneficial to delay converting your RSP until then, and live off your non-registered savings instead. This will allow your registered savings to continue growing in a tax-deferred environment that much longer. And even when you do convert your RSP into a RIF, withdraw only the minimum amount, unless you require the income.
Remember to Name Your RSP Beneficiary
In most provinces, by naming your RSP beneficiary, you can ensure that your RSP assets go directly to your beneficiary when your estate is settled—thereby avoiding probate costs.
