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Understanding How RRSP Contribution Limits Work

Understanding How RRSP Contribution Limits Work

RRSP season isn’t what it used to be. With most Canadians opting to make regular contributions to their retirement savings plans throughout the year, the RRSP deadline carries less importance than it did, say, 10 or 20 years ago. However, regardless of when you choose to fund your RRSP, it’s important to know the rules around when and how much you can contribute. After all, even in the age of Tax Free Savings Accounts (TFSAs), RRSPs continue to be an important retirement savings vehicle for Canadians of all ages.

What Is an RRSP?

The Registered Retirement Savings Plan, or RRSP, is a tax-sheltered investment account designed to help individuals save for their retirement with two key benefits: A tax deduction on contributions and tax-deferred growth inside the RRSP plan. It was first introduced by the federal government of Canada in 1957. Over the years, the mechanics of the plan remains relatively the same, although contribution limits have certainly increased.

Who Can Contribute to an RRSP?

Anyone with a SIN number, who has earned income and filed a tax return, can contribute to an RRSP until the end of the year in which they turn 71. If you contribute to a spousal RRSP plan, contributions can be made until your spouse turns 71. That way, if they are a few years younger than you, the period in which you can contribute can be extended.

RRSP Contribution Room Explained

Each year that you earn income, you create RRSP contribution room. This amount, also known as a contribution limit, is the lower of 18% of your employment income from the previous year, or the government’s maximum annual limit, less any company-sponsored pension plan contributions that you made. The annual limit for the 2019 tax year is $26,500. Next year, the limit will rise to $27,230.

Let’s say you earned $85,000 in 2019, and you didn’t contribute to a pension plan. The contribution room you would generate for this year would be $15,300. You would have until March 2, 2020, to contribute this amount, and have it deducted from your 2019 income. Now, let’s say you earned a much higher $185,000 in 2019. 18% of your income would be $33,300, which exceeds the annual maximum of $26,500. In this case, your contribution limit for the year would be $26,500, less any pension plan contributions that you made.

What Is Unused Contribution Room?

Any available contribution room that you don’t use can be carried forward to future years, as unused contribution room. You don’t have to worry about keeping track of this amount, the government will do it for you.

How Do I Find Out What My Contribution Limit Is?

There are a couple of ways to find out your contribution limit. You can check your annual CRA Notice of Assessment, which is the income tax summary document that the CRA sends you after your taxes are done. Also, you can check your CRA My Account online, where your up to date limit will be listed. You can also call the CRA TIPS telephone support line.

How Do Spousal RRSP Contributions Work?

Spousal contributions can be made into a spousal RRSP. This is an RRSP where the annuitant (plan holder) and the contributor are different. The idea is that the plan is opened in the name of the lower-earning spouse, while the spouse with the higher income acts as the contributor. They benefit from the tax deductions during their working years, but after retirement, the funds are withdrawn (and taxed) in the hands of the planholder. There’s a distinct tax advantage if the planholder still has the lower marginal income tax rate in retirement.

I should point out that the contributor to a spousal RRSP plan does not earn additional contribution room. Total contributions to all plans must not exceed your designated annual limit.

Does My Work Pension Plan Affect My RRSP Contribution Room?

As I mentioned earlier, any contributions you make to a work pension plan reduce your RRSP contribution limit. You don’t have to worry about keeping track, however, as the CRA will do this for you. When you file your taxes, you report your Pension Adjustment in your return, so they have this information. Your available RRSP contribution room that’s listed on your Notice Of Assessment already has any pension plan contributions factored in.

Can I Overcontribute to My RRSP?

It’s important to make sure that you never overcontribute to your RRSP. The government does grant a lifetime allowance of $2000 for overcontributions, but if you exceed that amount, you’ll be charged a 1% penalty per month on your overcontribution until it is brought within your RRSP limit. In other words, overcontributing could get very expensive.

What Does the RRSP Deadline Refer To?

The RRSP deadline is the last day in which you can deposit to your RRSP, and use the contribution as a tax deduction against your previous year’s income. For example, March 2, 2020 is the RRSP deadline for the 2019 tax year. That’s the last day that RRSP contributions can be deducted against your 2019 income. Even if you make contributions throughout the year, sometimes, after reviewing your tax situation, you need to top up your contribution. The RRSP deadline is your last chance to do that.

RRSP vs. TFSA

These days, Canadians have more than one tax-sheltered investment option available to them. First introduced in 2009, TFSA accounts have become a popular savings vehicle, and one that many Canadians have included in their retirement strategy. The beauty of the TFSA is that you are not taxed when the funds are withdrawn, as you are with an RRSP. However, you also don’t benefit from the tax-deductibility of contributions to your account. For this reason, RRSPs maintain their importance, for the immediate tax savings. In my opinion, investors should hold both RRSPs and TFSAs, although how the plans are used will vary from person to person.

How Should I Invest My RRSP?

The answer to this question depends on a lot of factors. There are endless ways to invest your RRSP money, but it really depends on the individual. You must take into account your investment timeframe (number of years to retirement), your personal risk tolerance, and whether you want to invest for yourself, or have someone else look after things for you.

These days, technology has made easier than ever to take control of your investments. That might mean taking a more hands-off approach via a robo advisor like Wealthsimple, or you could open a discount brokerage account, and be in charge of the entire process. Personally, I do my own investing through Questrade, with the main draw being incredibly low fees. Another option is to open an RRSP account where you bank, via an in-person meeting with an advisor. The most important thing is that you are contributing to an RRSP if you haven’t already started.

RRSP Contributions: How Much of A Refund Will I Get?

When you contribute to an RRSP, that amount is deducted from your employment income for the previous tax year. So, if you earned $65,000 in 2019, and contributed $7500 to your RRSP prior to the March 2nd deadline, your taxable income drops to $57,500. The amount of tax you save will depend upon your marginal tax rate, as well as the province you live in.

Generally speaking, the higher your income, the higher your tax savings will be. For every $1000 you contribute to an RRSP, you could save anywhere from $250 to more than $300 in income tax. If you’re not in a situation where you’re having to pay additional tax when you file your return, then this amount becomes part of your refund.

Final Thoughts on RRSP Contributions

With this post, my hope is that you now have a good knowledge of how RRSP contributions work, and how contributing to an RRSP can not only save you money today but fuel your retirement savings for the future. For information on RRSPs, feel free to check out my guide to RRSP withdrawals, and this article on the RRSP deadline.

Comments

  1. Open source portfolio

    RRSP are great for people with inconsistent income. If you work contract and you have a year with no income it would be a great time to withdraw from RRSPs since your tax obligations would be minimal.

  2. Gisele

    Do you know what the consequences are for overcontributing to an RRSP? I put a lump sum in towards the end of last year but checked my contribution allowance and see that I am way over it. Would it be better to remove the overage and put it into a different account prior to filing/assessment date?

    Thanks!

    • The Ghost

      Hi Gisele,

      Overcontributions to an RRSP are generally penalized at a rate of 1% per month on the amount of the overcontribution; however, you are given a $2000 “buffer” by the CRA. Essentially, if you over-contribute by $2000 or less over the course of your lifetime, you will not face any penalties, though you do not get the tax deduction on any over-contribution. If your over-contribution is over $2000, it would be best to take out that amount asap to minimize penalties. Here is a useful CRA link: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/xcss-eng.html.

  3. GetSmarterAboutMoney.ca

    This is a really informative post Jim! Investor Education Fund has a RRSP Savings Calculator that is useful in estimating how much your RRSP savings will provide in income once you retire. http://www.getsmarteraboutmoney.ca/tools-and-calculators/rrsp-savings-calculator/rrsp-savings-calculator.aspx

  4. Terri Sterner

    RRSPs are just about always good. You want to save for retirement and this is a great way. The smaller tax burden means a guaranteed win from that perspective. Furthermore, by not paying the tax right away, you’re letting that money grow and, in essence, have those returns pay the tax burden on the other moneys. It’s a shame that the RRSP limits are so low, though more people don’t hit them anyway.

  5. Virata Gamany

    Did you know that you can also use RRSP’s to purchase investment properties either by loaning it to yourself as a 2nd mortgage or investing with a property investment company that has a RRSP eligible program.

  6. Virata Gamany

    I don’t think they are always good though. There is no such financial instrument that fits all. At VSM we believe strongly in real estate investments but we certainly don’t think it’s for everyone. Virata Gamany

  7. Tim @ Faith and Finance

    I was just thinking about learning more on RRSP accounts. Can you tell me if there are penalties for withdrawing early? For US account, you will get a 10% penalty for early withdrawal (unless you meet certain provisions). Do RRSPs have similar penalties?

    Tim

    • The Ghost

      Hi Tim,

      Any time you withdraw from RRSP accounts, other than as a result of some very specific circumstances such as those around a marriage dissolution, the amount of the withdrawal is included as part of your taxable income for the year in which the withdrawal is made. In years in which your taxable income is already high, this will obviously be costly. In years in which your taxable income is low, it might be worthwhile.

  8. Virata Gamany

    There are definitely penalties though you can find institutions that will lend you the money for a low rate if you place the money with them

  9. artur

    I have some credit card debit and was thinking of using my RRSP to pay it off ! would this be a good idea? I make around 58,000 a year credit card is at 9,000 and my rrsps are at 13,000
    thank you

  10. IVY

    Hi there, just became alert to your weblog through Google, and discovered that it is truly informative. I’m going to watch out for brussels. It’ll appreciate in the event you continue this in future. Many individuals will probably be benefited from your writing. Cheers!

  11. erkek

    I have some credit card debit and was thinking of using my RRSP to pay it off !I make around 88,000 a year credit card is at 19,000 and my rrsps are at 23,000
    thank you

    Reply

  12. james smith

    It so nice one.Thanks for sharing.

  13. Paul

    If I did not earn any income this year, 2011, and I withdraw $25,000 (lump sum) from my rsp, my witholding tax will be $7,500, but my tax payable on reported taxable income of $25,000 (ontario resident) is approximately $3000. Will I get a refund cheque for the difference from CRA when I file my return? In other words, is it worth while to do this?

    • Jason

      Hi Paul, did you ever get an answer to your question below?

      If I did not earn any income this year, 2011, and I withdraw $25,000 (lump sum) from my rsp, my witholding tax will be $7,500, but my tax payable on reported taxable income of $25,000 (ontario resident) is approximately $3000. Will I get a refund cheque for the difference from CRA when I file my return? In other words, is it worth while to do this?

  14. Michael Czan

    For most first time home buyers, using RRSP’s to buy a home is a great option.

    visit Mississauga Real Estate Professionals for more home ownership incentives
    http://www.mississaugarealestate.pro/home-ownership-incentives

  15. Amir Mlivic

    can I withdrawl $5000 yearly? to get the 10% withdrawal tax rather then taking out $15000 right away and getting taxed more? or do they keep a record of your withdrawals?

  16. Mayme

    Tax return question: in 2015, I contributed $2600 for my rrsp, bought a house and withdrew $1,800 to cover a portion of my downpayment. How much should I report in schedule 7 of my income tax return for 2015? Should it be $800 or the whole 2015 rrsp contribution?

  17. Victoria Allard

    I put some funds into an RRSP Plan, I have the registered numbers, however I cannot find a way to find out where they are.
    I have all my tax returns that show they were purchased and that none were cashed. I tried the bank of Montreal and they would not help me.

    What do I do now.

  18. Michelle

    My company just gave me my bonus via RRSP contribution in the beginning of February 2018. I need to withdrawal this for an unexpected expense before the end of February 2018. How will this affect my taxes?

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