You start earning RRSP contribution once you’ve started working, and you’ve filed your taxes. The contribution room is based on 18% of the income you made in the previous year, up to a maximum amount of $26,500 (as of 2020). It doesn’t matter if you’re a full-time employee or a freelancer, you earn that room regardless, as long as you file your taxes.

What’s great about your contribution room is that you don’t need to use it all up right away. Any unused contributions carry over indefinitely. This is an excellent option for people who don’t have any extra funds available to put towards their RRSP, or for people who are trying to maximize their tax strategy.

One thing to note: If you have a pension plan through your employer, your RRSP contribution room is lowered due to the pension adjustment. This isn’t a bad thing, it’s just meant to level the playing field for people who don’t have a pension.

Your contributions are tax-deductible

The reason Canadians love their RRSP is that any contributions made reduce your taxable income. For those in a high tax bracket, making contributions could put you in a lower tax bracket. Remember, there is a contribution limit as outlined above. The CRA does give you a lifetime excess contribution limit of $2,000, but if you go over that, you’ll pay 1% in tax per month on the cumulative excess contributions.

Once your money is invested within your RRSP, that money grows tax-free. That means you can sell your investments within your RRSP without having to pay any capital gains. That said, when you eventually withdraw the money from your account, it’s considered income and is taxed at your marginal tax rate.

An RRSP may not always be the best choice

Since RRSPs reduce your taxable income, if you’re in a lower tax bracket, using a Tax-Free Savings Account (TFSA) may be the better choice. Generally speaking, if you’re making $50,000 or less, a TFSA is the way to go. Even though you won’t get an immediate tax break, you could come ahead in the long run by investing in your TFSA first.

RRSP contribution room carries forward, so there’s no need to max it out right away. If you start to make more than $50,000 per year, then start contributing towards your RRSP. In an ideal world, you’d max out both every year, but that’s not possible for everyone.

Your RRSP can be used towards your first home

Usually, you’d have to pay taxes if you were withdrawing from your RRSP early, but not if you’re a new homeowner. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP to buy your first home. If you’re buying with a partner, you could each withdraw that amount, so you could have a total of $70,000 available to you.

The money withdrawn does need to be paid back over 15 years. So if you borrowed the entire $35,000, you’d have to repay $2333.33 each year after the first year of your purchase. If you miss a payment, you will pay tax on that amount.

You can continue your education with your RRSP

With the Lifelong Learning Plan (LLP), you or your spouse can withdraw up to $10,000 in a year with a total limit of $20,000 over four years without paying taxes. Once you’re no longer participating in the LLP, you need to repay 1/10 of the total amount you withdrew, every year until it’s been fully repaid. That means if you withdrew $10,000 in total, you would need to repay $1,000 a year. If you don’t repay the full amount or miss a payment, that amount is included as income for the year and will be taxed accordingly.

If you do decide to withdraw money from your RRSP via the LLP or HBP, keep in mind that you’re missing out on the tax-sheltered growth had you left the money in. For some people, withdrawing the money is a must, but if you have extra funds available, you may want to leave your RRSP alone.

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.

Barry Choi is a paid spokesperson of Sonnet Insurance.