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HomePersonal BankingWealth ManagementSmall BusinessCommercialCorporate & InstitutionalAbout BMO

RSP Essentials

An RSP is the most effective retirement saving and investing tool available to most Canadians. It lets the money you invest grow unaffected by taxes until withdrawn. That means your money has the potential to grow faster and you’ll accumulate more than if you invest outside an RSP. What’s more, you’ll get a tax deduction for every dollar you put into an RSP, reducing your annual tax bill.

Here’s how it works.

Tax Sheltered Investment Growth

Investments in an RSP grow on a tax-deferred basis until money is withdrawn. The fact that your plan is “registered” with the Canada Revenue Agency allows you to benefit from this tax-deferred growth.

Outside an RSP, most investments are taxed. Interest is fully taxable, half of capital gains are taxable and dividends are taxable but eligible for the dividend tax credit. Inside an RSP, none of these taxes apply.

Because you pay no tax on investment growth while your money remains inside an RSP, your investments compound far more quickly. At the end of the road, that makes a huge difference.

RSP vs. Non-RSP Investing


RSP Non-RSP
Amount Invested $10,000 $10,000
Years Invested 30 years 30 years
Marginal Tax Rate N/A 46%
Average Annual Return 6% 6%
Total Savings $838,016.77 $510,717.60
Difference $327,299.17

Even though you’ll be taxed on amounts you withdraw from RSP savings in retirement, your tax rate is likely to be lower than during your working years. So the tax bite will be considerably less. And the money left in a retirement plan continues to grow sheltered from tax.

Reduce Yearly Income Tax

Contributions to an RSP are tax deductible. So they lower your annual taxable income and your yearly income tax bill. The tax savings will depend on your marginal tax rate and how much you contribute to your RSP. In 2013 you’re allowed to contribute the lesser of $23,820 or 18% of the earned income reported on your previous year’s tax return. If you make less than your maximum allowable contribution in any year, the shortfall can be carried forward to future years.

The dollar maximum is revised annually, so contribution limits regularly increase. Since 2011, increases have been linked to average Canadian wage growth.

You have until March 1 of the following calendar year to make contributions for the current tax year (subject to change if March 1 falls on a weekend or holiday or if it’s a leap year).

Range Of Investment Possibilities

You can hold a wide range of investments in an RSP. These include cash, mutual funds, GICs, stocks and bonds. If you want to hold a mix of different investment types or a variety of individual investments such as stocks, consider a self-directed RSP. A self-directed plan allows a number of investments under the umbrella of a single RSP.

Easy Transition To Retirement Income

When it’s time to use the money you’ve accumulated in your RSP to generate retirement income, it’s easily done. Most Canadians choose to convert their RSP to a Retirement Income Fund (RIF). A RIF provides steady retirement income (subject to government-mandated minimum annual withdrawals), while the money that remains in the plan continues to grow sheltered from tax. Annuities are another popular income choice. You use funds in your RSP to purchase an annuity, which provides regular fixed income for life or a specified term. Payments are taxable when received.

RSP funds can be easily transferred to a RIF at BMO Bank of Montreal. Annuities are available through life insurance companies and their agents.

Income-Splitting Potential

The right strategies can make your RSP an even better tax-saving tool. For example, spouses can “split” income to reduce their combined tax bill. This can be done while saving for retirement through a spousal RSP, or in retirement by taking advantage of pension income-splitting opportunities.

By following a few simple strategies, you can make the most of your RSP. You’ll have the potential to create more savings for a more comfortable retirement.

Start Retirement Planning Early

The secret to RSP growth is tax-deferred compounding. The sooner in life you start contributing to an RSP, the more time you have to take advantage of this opportunity.

Years Invested 35 Years 20 Years 10 Years
Amount Invested $10,000 $10,000 $10,000
Average Annual Return 6% 6% 6%
Total Savings $1,181,208.67 $389,927.27 $139,716.34

Maximize Contributions

To make the most of an RSP you should contribute as much as you can every year. How much you’re allowed to contribute will depend on the limit set by the federal government each year, and on your income level. For the 2011 tax year the maximum is $22,450 or 18% of the earned income reported on your previous year’s tax return (whichever is less).

One way to help ensure you reach your maximum is by contributing periodically throughout the year. Many people find it easier to regularly contribute smaller amounts—for instance, every month—than to find a large lump sum once a year. Use our Continuous Savings Plan to make regular contributions.

Make Up For Missed Contributions

If you can’t make your maximum contribution every year, you have a second chance. Any unused contribution room can be used in future years. For example, if your limit this year is $22,450 and you make a $10,000 contribution, you can make an additional $12,450 contribution in another year. The extra contribution is eligible for the RSP tax deduction. Usually, it’s best to make up for missed contributions as quickly as you can, so your money goes to work faster.

Consider An RSP Loan

If you have RSP contribution room from past years and don’t have the cash on hand to use it, consider a Retro-Activator® RSP Loan. If you need funds up to $21,000 to make this year’s contribution, choose an RSP ReadiLine™ Account. Once this line of credit is set up, you can access funds without applying again. Get more information on RSP loans.


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