An RRSP is a great way to save for your retirement. However, the Canadian government does put a limit on how much you can contribute and deduct from your taxable income.
What is a Registered Retirement Savings Plan (RRSP)?
A Registered Retirement Savings Plan is a savings account with special rules set out by the Canadian government to encourage people to build a retirement nest egg. When you contribute to your RRSP, you can put the money into a wide range of investment vehicles, depending on your risk tolerance. These include stocks, mutual funds and guaranteed investment certificates.
What are the main benefits of an RRSP?
The Canadian government provides incentives to people to contribute as much as possible to their RRSP, within the set dollar limit. The two primary benefits of an RRSP are:
- Tax deduction: When you contribute to your RRSP, you receive a tax deduction. When you file your income tax at the end of year, this deduction reduces your taxable income. Depending on how much tax you have already paid, you could receive a tax refund as a result of your RRSP contribution.
- Tax-free growth: Any capital gains and interest earned in your RRSP are tax-free. This means that you don’t have to report anything on your income tax return. You only have to start paying tax when you make withdrawals from your RRSP on retirement.
What is an RRSP deduction limit?
Like all government programs, there is a limit to the generosity. You are only allowed to contribute 18 percent of your previous year’s earned income.
Furthermore, there is a cap on how much you can put in – so those people who earn very high incomes can’t put in 18 percent of their earned income. The maximum RRSP contribution for 2021 was $27,830. And for this year, the maximum is $29,210.
You can find your RRSP contribution room by logging into your online Canada Revenue Agency account. If you don’t have an online account, you can review the Notice of Assessment that you received in the mail from the CRA. This shows next year’s contribution room plus any unused contribution room from previous years.
You must be careful not to make an RRSP over contribution. The CRA does allow one lifetime overcontribution of $2,000. After that, you will face penalties, which are 1 percent of the overcontribution per month that it remains in your account. If you accidentally overcontribute, it’s best to solve the problem as quickly as possible so that penalties are minimized.
If you have additional retirement benefits, contributions to these will reduce the amount you can contribute to your RRSP. This applies to an employer group RRSP, a Registered Pension Plan and a Deferred Profit-Sharing Plan.
If you contribute to both your own retirement through an RRSP and your spouse’s via a Spousal RRSP, you must stay within your contribution limit. The RRSP limit is the total amount you can contribute to all of your accounts combined.
What is an unused RRSP deduction limit?
There’s more good news about the RRSP program. If you don’t have enough cash to put in this year, you can carry forward the remaining contribution room until the next year. Contribution room just continues to accumulate.
Can I withdraw my RRSP deduction limit?
You can withdraw from your RRSP at any time. When you make a withdrawal, the government applies a withholding tax. You will receive your RRSP withdrawal, less the tax. The withholding tax varies depending on how much your take out. Withdrawals of up to $5,000 face a 10 percent tax. For those between $5,001 and $15,000 the tax is 20 percent. Above that amount and you will see 30 percent withheld.
RRSP contribution limits (2021, 2020, 2019, 2018, 2017)
Each year, the Canadian government adjusts the RRSP limit for contributions. Usually, it goes up a little bit based on the rate of inflation. Here are the limits for recent years:
2023: $30,780
2022: $29,210
2021: $27,830
2020: $27,230
2019: $26,500
2018: $26,230
2017: $26,010
Example of contribution room calculation
Anthony started the year with $20,000 of unused RRSP contribution room from previous years. He earned $100,000 this year, which gave him $18,000 of room. Therefore, his total contribution room is $38,000. During the year, he made contributions totaling $10,000. This means that he can carry forward $28,000 in contribution room to future years.
What is the age limit to contribute?
After Dec. 31 of the year you turn 71, you can no longer put money into your RRSP. All of that unused contribution room disappears and you can’t make contributions to get a tax deduction.
RRSPs are a great opportunity
When you contribute to your RRSP, you receive a tax deduction. Assuming that you have had tax deducted from your paycheque, you are likely to get a tax refund. If you feel like saving even more money, you can put the refund right into your RRSP, earning you another tax deduction.
One of the best aspects of an RRSP is that the investments grow tax-free as long as you leave your money in the account. When you are young, you appreciate the tax deduction. As you near retirement, you like the fact that your investments are growing and providing you with a great nest egg.
The annual RRSP limit is 18 percent of your earned income, with a maximum set each year by the Canadian government. If you don’t contribute the maximum, you can add the unused contribution room to future years. However, don’t feel bad if you can’t use this room – most Canadians don’t. But be sure to take advantage of it if you receive a windfall, such as an inheritance or a lottery win.
Good luck in saving for your retirement!
