A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. It has special tax advantages associated with it to encourage saving for retirement.

Here’s how it works:

1. Contributions: Money that you put into an RRSP is used to purchase investments (like mutual funds, stocks, bonds, etc.). The income earned from these investments within the RRSP is usually exempt from tax as long as the funds remain in the plan.

2. Tax Deductions: The contributions you make to an RRSP are tax deductible. This means they can be used to reduce your taxable income, thereby potentially putting you in a lower tax bracket.

3. Withdrawals: Eventually, you will pay tax on the money—generally when you withdraw your savings upon retirement, when typically your income and hence tax rate may be lower than during your contributing years.

4. Maximum Deductibility Limits: For 2021, if you have earned income of $154,611 or more, then you can contribute up to $27,830 into your RRSP. Your personal limit might be lower if you participate in a pension plan or made contributions to a spousal RRSP.

5. Contribution Limit: Your contribution limit for 2021 is 18% of earned income reported on your 2020 tax return up to a maximum of $27,830. However, if you did not use all of your RRSP deduction limit for the years 1991-2020, you can carry forward unused amounts to 2021.

6. Over-Contribution: If an over-contribution occurs—up to $2,000 more than the limit—a penalty isn’t assessed by the CRA but no deduction can be claimed for over-contributions.

A great advantage of having an RRSP in addition to saving for retirement is that it can help first-time home buyers or those looking to fund their education. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP towards buying your first home, while the Lifelong Learning Plan (LLP) permits you to withdraw up to $10,000 a year (up to a total of $20,000 in a 4-year period) from your RRSP to finance full-time training or education for you or your spouse. These amounts need to be repaid back into the RRSP over time.