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5 Reasons to Consider Making an RRSP Contribution for Tax Year 2025
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Summary
Contributing to an RRSP tax year can help reduce your taxable income while building long-term retirement savings. Here are five key reasons to consider, from tax advantages and contribution limits to compounding growth and income-splitting opportunities. Understanding how much to contribute and when can help you make the most of these benefits. Contributing to a Registered Retirement Savings Plan (RRSP) for tax year 2025 may be more important than ever. Here are 5 reasons to consider.
1. Save for retirement with RRSP contributions
Whether your RRSP contribution will be large or small this year, it may be more important than ever to ascertain what retirement savings you will need and how you will fund a comfortable retirement.
Many Canadians may not have saved enough money to fund their retirement.
Evaluating your plan to save for retirement and determining how much you can contribute to your retirement savings can help you in the future. You can make an RRSP contribution for the 2025 tax year by the RRSP contribution deadline, March 2, 2026.
The 2024 Canadian Retirement Survey1, from the Healthcare of Ontario Pension Plan (HOOPP) and Abacus Data, indicates Canadians are unprepared for retirement.
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58% of Canadians are concerned about having enough money in retirement.
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26% of unretired Canadians (aged 55-64) expect to continue working in retirement to support themselves.
The study also states that 42% of homeowners are counting on selling their property to fund their retirement.
The findings also suggest a concerning retirement outlook for unretired Canadian women where nearly two-thirds (62%) of unretired women aged 55-64 feel unprepared for retirement, compared to half (48%) of unretired men aged 55-64. Ingrid Macintosh, Vice President Wealth, TD Asset Management, says women are out-learning their male peers, so why aren't they out-investing them? Learn more about it in this article.
Last but not the least, 59% of unretired Canadians who have employer-sponsored retirement plans feel prepared for retirement.
Considering these findings, having a plan to invest in RRSP seems more crucial than ever and could potentially help build confidence about the future.
How much will you need to retire comfortably?
Without knowing how long retirement will last, planning how much to save may seem like guesswork. However, being realistic about the spending habits you expect to have can be helpful in defining your retirement portfolio's size.
There are different schools of thought regarding how much money you may need for retirement – as well as how to arrive at the percentage or dollar amount that you may require.
Savvynewcanadians.com indicates that to determine an actual required figure, you can multiply the yearly retirement expenses you expect to need x 25.
However, while newswire.ca reports that retirees could expect to spend approximately 70%-80% of their pre-retirement budget, Human Resources Director magazine (hcamag.com) suggests that Canadian employees may need 11 times their final pay to retain their pre-retirement standard of living when they retire.
The long and the short of determining how much retirement savings you will need will depend on each individual’s circumstances and requires planning, including reviewing your goals and contributions for each tax year.
2. Consider using RRSP contributions to help reduce your taxable income
Making an RRSP contribution can potentially reduce the amount of tax you will be subject to pay on your income tax return.
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The way an RRSP works is that it helps you save for the future while deferring tax. The amount you contribute to your RRSP is deducted from your taxable income for the tax year to which the contribution was applied. By Dec. 31 of the year in which you turn 71, your RRSP must either be transferred to a Registered Retirement Income Fund (RRIF) or a Life Annuity, or be withdrawn in cash. A RRIF is designed to provide you with retirement income.
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In retirement, your other sources of income may potentially be lower than they were in the years you were funding your RRSP, and amounts withdrawn from the RRIF may, therefore, be subject to a relatively lower tax rate.
Did you know that the funds in RRSPs can be invested? After you've contributed to your RRSP account, you are able to invest the funds into a variety of financial products such as Guaranteed Investment Certificates (GICs), mutual funds, Exchange-traded funds, stocks and bonds (depending on the type of RRSP) to potentially grow the money that you've contributed. Since it's a tax-deferred account, taxes will be payable once you withdraw funds from the account. However, it is important to keep in mind that:
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An RRSP withdrawal (except for a withdrawal under the RRSP Home Buyers' Plan or the Lifelong Learning Plan), will be reduced by withholding tax.
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The amount of withholding tax varies depending on the amount withdrawn and your place of residence. The withdrawn amount will be considered taxable income in the year withdrawn.
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An RRSP withdrawal (except for a withdrawal under the RRSP Home Buyers' Plan or the Lifelong Learning Plan) cannot be recontributed to your RRSP; the amount withdrawn is not added to contribution room for future years.
3. Take advantage of the RRSP contribution limit
The RRSP contribution limit depends on the tax year. For 2025, it is 18% of your 2024 “earned income” – up to a maximum of $32,490, subject to any pension adjustment. The maximum for tax year 2025 is $33,810.2
You may want to consider maximizing the contributions within your RRSP contribution limit. The earlier you contribute and the more you contribute within your limit, the higher the potential benefits of tax deferral on income earned in the RRSP will be.
If you are beginning to plan to save for retirement , other considerations you may want to keep in mind can include your tolerance for risk, your time horizon, retirement expenses and returns after-tax that you may require, and inflation.
As you continue to save for your retirement, you may want to evaluate your retirement savings plan periodically, as this will help ensure that you are still on track, providing the opportunity to rebalance your portfolio and make changes if needed.
4. Harness the power of compounding on your RRSP investments
Starting to save for retirement at a younger age can help you take advantage of compound growth within an RRSP.
Although it's never too late to start saving for retirement, there are advantages to starting to contribute to your RRSP early. Compound growth occurs when income is earned not only on the funds you contribute to your RRSP, but also on the reinvested income from those original contributions.
5. Reduce your family's tax burden with a spousal RRSP
A Spousal RRSP allows you to contribute money to your spouse or common-law partner’s RRSP, up to your personal contribution limit. When a contribution is made to the spousal RSP, the contributor receives a tax deduction for the tax year in which the contribution is applied.
The difference between a personal RRSP and a spousal RRSP is that, with a spousal RRSP, one spouse is the annuitant (the plan holder or owner of the RRSP), while the other spouse (or common-law partner) is the contributor to the plan. Note, the spouse with the lower income can still contribute to their own plan, provided there's still available contribution room.
A Spousal RRSP can be helpful when there is a large difference in incomes between partners. Let's say you're the one with higher income. You contribute to a Spousal RRSP and end up using some of your contribution room in the process. However, in retirement, your spouse withdraws from it. This can be a way to efficiently defer taxes in the current year as well as benefit from withdrawals, which will be taxed based on the marginal tax rate of the lower-income earner.
Making regular RRSP contributions could help you save for retirement. For more details on RRSPs, check out "What is an RRSP and how it works".
Frequently Asked Questions
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a government-registered account designed to help Canadians save for retirement on a tax-deferred basis.
To contribute to an RRSP, you must have earned income and file a tax return in Canada to generate contribution room. You can contribute to your own RRSP until December 31 of the year you turn 71.
As long as you have available contribution room, you can continue to make contributions each year. You may also contribute to a spousal RRSP to help split income in retirement, provided you have sufficient contribution room.
How much can I contribute to my RRSP?
Your RRSP contribution limit is based on 18% of your previous year’s earned income, up to the annual maximum set by the CRA, plus any unused contribution room carried forward from prior years. This limit applies to contributions you can make for the current tax year. If you’re a member of a pension plan, your available room may be reduced by a pension adjustment.
Your exact contribution limit is calculated by the CRA and can be found on your latest Notice of Assessment or by logging into your CRA account. Staying within your limit helps you avoid overcontribution penalties, while making the most of your RRSP can help reduce your taxable income and grow your savings tax-deferred.
To learn more about your contribution limit, visit the CRA's website here.
What is the RRSP contribution limit?
Your RRSP contribution limit is the maximum amount you can contribute each year. It is based on 18% of your previous year’s earned income, up to the annual maximum set by the CRA, plus any unused contribution room carried forward from prior years.
For example, for the 2025 tax year, the annual maximum is $32,490 (subject to pension adjustments). Your exact contribution limit is calculated by the CRA and can be found on your latest Notice of Assessment or by logging into your CRA account.
How do RRSP contributions affect my taxes?
RRSP contributions can help reduce the amount of income tax you pay. Any contributions you make are generally tax-deductible, which means they can be used to lower your taxable income for the year. This may result in a tax refund or a reduction in taxes owed.
Any investment growth within your RRSP is tax-deferred, so you won’t pay tax on earnings as long as they remain in the plan. When you withdraw funds, they are taxed as income at your marginal tax rate at that time.
Who is eligible for an RRSP?
To contribute to an RRSP, you must have earned income and file a tax return in Canada to generate contribution room. You can contribute to your own RRSP until December 31 of the year you turn 71.
As long as you have available contribution room, you can continue to make contributions each year. You may also contribute to a spousal RRSP to help split income in retirement, provided you have sufficient contribution room.
For more information on RRSP eligibility, visit the CRA's website here.
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