One of the ways that the Canadian government encourages you to save for retirement is by offering the RRSP. The RRSP is an investment account that allows you to save tax-advantaged dollars for your future. You receive a tax deduction each year when you make your RRSP contribution.
However, you don’t always receive a tax deduction in the total amount of your contributions to your RRSP. The Canada Revenue Agency uses a formula to determine how much you can deduct from your taxes (or your spouse’s or common law partner’s taxes) each year. This is your RRSP deduction limit.
How Does the CRA Figure Your RRSP Deduction Limit?
It helps to understand how the CRA determines your deduction limit. The CRA uses a formula to determine how much you can deduct on your taxes. This formula takes into account your earned income for the previous year, as well as unused RRSP deduction room at the end of the previous year. If you have pension adjustments, pension adjustment reversals, or past service pension adjustments, these items are taken into account as well.
If you want to find out what your deduction limit is, you can look at the information provided by the CRA. You can use the RRSP Deduction Limit Statement for a quick and easy way to see what your limit is. It’s also possible for you to see it on the T1028 form that you are sent after your previous year’s return is processed. This can give you an idea of what to look forward to in the coming tax year.
The CRA will change your deduction limit if there are changes to your financial situation. If your earned income goes up or down, your RRSP deduction limit may also change. The maximum deduction limit for 2013, for example, is $23,820.
You should understand, though, that you don’t get to deduct interest you paid on money borrowed to contribute to your RRSP. Many people borrow money in order to boost their retirement account contributions. While the amount that you contribute can get you a tax break, the interest that you pay on the loan doesn’t count as part of your RRSP contribution, and is therefore not tax deductible.
Maximizing RRSP Contributions
You can gain a great benefit for the future when you make the effort to maximize your RRSP contributions. Using information about your RRSP deduction limit, you can get the best possible tax break now, and reap the benefits of tax-deferred growth on your investments.
Since the money in your RRSP isn’t taxed until you withdraw it, it grows more efficiently. Instead of being taken out of your account to pay taxes, it can earn compound returns over time. Then, when you are ready to actually use the money, you pay taxes when you withdraw. This can be a solid way to boost your real returns, and grow your wealth a little faster over time.
Saving for your retirement is a smart move. You can build up enough to help you remain comfortable in your later years. And, while you’re at it, you might as well enjoy the tax benefits offered by the government.