RRSP Investors: Here’s How to Lower Your Tax Bill in 2025

Here’s why most Canadian retirees should consider holding low-cost ETFs such as VSP in the RRSP.

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The Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings account. Any contributions made to the registered account are tax-deductible, which helps lower the tax bill significantly. Canadian residents can contribute up to 18% of the previous year’s earned income as well as any unused contribution room from earlier years. So, if you earned $100,000 in 2024, you can contribute up to $18,000 towards the RRSP this year, lowering the taxable income to $82,000.

Through spousal RRSPs, Canadian couples can reduce the overall tax burden by shifting retirement income from the higher-income spouse to the lower-income spouse, making it an effective tax planning tool.

What investments can you hold in an RRSP?

You can hold various qualified investments in an RRSP, including Guaranteed Investment Certificates, mutual funds, exchange-traded funds, government and corporate bonds, and individual stocks. In addition to tax-deductible contributions, you can benefit from tax-deferred investment growth.

Alternatively, first-time homebuyers can withdraw funds under the Home Buyer’s Plan for a down payment. Moreover, funds can also be withdrawn under the Lifelong Learning Plan for education purposes.

Hold diversified ETFs in the RRSP

As the RRSP is a retirement account, it is essential to gain exposure to asset classes positioned to beat inflation over time and build long-term wealth. Notably, asset classes such as equities and gold have consistently showcased an ability to deliver inflation-beating returns.

For example, the S&P 500 index has returned 10% annually in the last six decades, which is exceptional. The S&P 500 index is among the most popular equity indices globally as it provides you with exposure to some of the largest companies in the world, including Apple, Nvidia, Microsoft, Alphabet, Meta Platforms, Amazon, and Tesla. For Canadians, the S&P 500 offers geographic diversification, which lowers overall risk.

Several Canadian exchange-traded funds (ETFs) track the S&P 500, and one low-cost fund is Vanguard S&P 500 Index ETF (TSX:VSP). This ETF is hedging to the Canadian dollar, shielding you from exchange rate fluctuations while providing access to the world’s largest economy.

The VSP ETF was launched in November 2012 and has attracted more than $4 billion in investments. Further, a $10,000 investment in the ETF in November 2012 would be worth over $45,000 today. With a management fee of just 0.09%, the VSP ETF offers cost-effective access to the U.S. stock market.

Build long-term wealth in the RRSP

In the short term, equities are highly volatile and can even pull back by 20% or more when macroeconomic conditions deteriorate. However, Canadian retirees should view every significant pullback in valuation as a buying opportunity.

Say you invest $15,000 annually in the VSP ETF for 30 years. If the fund continues to deliver 10% annual returns, your investment would balloon to $2.71 million over three decades. Even if we lower the expected return to 8%, your portfolio will be worth $1.83 million.

While this strategy might seem boring, it is highly effective. In fact, investing in low-cost index funds such as the VSP will help you beat the majority of fund managers on Wall Street.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

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