Not only will it ensure you have the income to kick back and enjoy retirement life, it will also help you save more money that would otherwise have gone to tax.

That’s where the Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) come in. Both offer special benefits that help you reduce your tax bill while simultaneously accelerating your savings growth. So let’s make sure we maximize those benefits.

Maximizing the benefits of your RRSP

The RRSP is a government-approved savings plan that helps you set aside up to 18% of your earned income each year towards retirement. To encourage saving, it also provides some valuable tax perks. Here’s what they are and how to make the most of them:

1. Reduce your tax today
   Every dollar you put into your RRSP can be used to reduce your taxable income and potentially move you into a lower tax bracket. So, basically, the more RRSP savings you set aside, the more money you save on your tax bill.  

Tip: RRSP contributions don’t have to be claimed immediately. You can delay using them to a year where you earn more and face a bigger tax bill, maximizing how much you save.

2. Shelter your savings growth from tax
   Money held in an RRSP isn’t taxed until you take it out. This is known as tax deferral or sheltering and means that any growth in your savings, whether interest or investment earnings, can accumulate tax free until you make withdrawals in retirement – at which point you’ll likely have a lower income and therefore owe less tax on the funds.

Tip: Consider contributing a lump sum to your RRSP at the beginning of the tax year instead of at the end – or make regular contributions throughout the year – because the earlier you put that money into your RRSP, the sooner it starts growing tax sheltered for you.

Optimizing withdrawals from your RRIF

An RRIF is what your RRSP becomes when you retire. You can make the switch at any time before the end of the year you turn 71. Once done though, you’ll be required to withdraw a steadily increasing amount from your RRIF each year based on your age and a percentage of your savings. So it’s important to be strategic about when you withdraw and how much.

1. Withdraw from less tax-efficient sources first
   The less you withdraw from your RRIF, the longer your savings have to grow tax free. So it’s often best to withdraw only the minimum amount required, taking most of your initial retirement income from investments and savings that don’t benefit from tax perks.
2. Use your partner’s age to calculate required withdrawals Age is just a number. But when it comes to your RRIF it can be an important factor to consider. That’s because the older you become the more you’re required to withdraw from the fund. However, if you have a younger spouse or common-law partner, you have the option to calculate your minimum withdrawal based on their age – meaning you have to take out less and your savings get to grow tax free longer.
    
   It's important to bear in mind, though, that this is permanent, so you won’t be able to change it later.
3. Spread your withdrawals out
   Putting off withdrawals isn’t always the right strategy for everyone. If you’ve saved a lot for retirement, the minimum RRIF amount you’ll have to withdraw will likely be large. This puts you at risk of being pushed into a higher tax bracket and facing a clawback (e.g. recovery tax) on your Old Age Security (OAS) pension.
    
   One way to prevent this is by converting your RRSP into an RRIF earlier. Your withdrawals will then be spread out over more years, ensuring they’re smaller and less likely to create tax issues.

Each person’s situation is different. Your income, age, financial position and more all factor into determining the best strategies to minimize your tax and maximize your retirement savings. That’s why it’s helpful to speak to an expert who can help you create a plan based on your personal situation.