Opening a Registered Retirement Savings Plan (RRSP) is a great way to help save for your retirement. However, there are plenty of rules to be aware of to ensure you use this account properly and make the most of it. Here’s what you need to know about RRSP contributions.
How do I make RRSP contributions?
You can make RRSP contributions by opening an RRSP account with a financial provider. If you use online banking, you can easily transfer funds to the RRSP account online or with the help of your financial advisor. You can choose to contribute to your RRSP in a lump sum once a year or you can also set up automatic deposits throughout the year.
What is the RRSP contribution limit
You can contribute only a certain amount to your RRSP every year. That amount is 18% of the total income earned in the previous year, up to a maximum limit set by the government (this number changes annually -set at $27,830 in 2021), plus any unused contribution amounts from previous years.
If you have a spousal RRSP, know that contribution limits are determined by the contributor’s overall limit. Opening a spousal RRSP does not give you additional contribution room.
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How do I calculate my RRSP contribution limit?
You don’t have to do a bunch of math to figure out your contribution limit. The Canada Revenue Agency (CRA) has this information on hand and will provide it to you. You can find it on your latest notice of assessment from the CRA (or if there are any changes since the last assessment, CRA will send you an updated RRSP limit on Form T1028).
You can also log into CRA’s My Account service online or via the app and you will see your RRSP deduction limit on your account overview. This limit includes any unused contribution room from previous years.
» See our picks: The best high-interest RRSPs in Canada
What if I go over my contribution limit?
If you contribute more to your RRSP than what is allowed, then it’s called an excess contribution and, typically, you have to pay tax on that extra amount. Generally, that tax is 1% per month of the excess contribution (if you have exceeded the limit by more than $2,000). However, if you withdrew the excess amount or contributed to a qualifying group plan then that tax will be waived.
Are RRSP contributions tax-deductible?
Yes. The amount that you contribute to your RRSP can be deducted from your taxable income, which essentially means you are charged less tax. Now, you don’t have to deduct all those contributions in the same year. You can choose to carry forward some or all your RRSP contribution deductions into future years.
Generally speaking, the more money you make — and the higher your tax bracket — the more helpful these tax deductions are. So, if you don’t currently pay a high rate of tax it might be in your best interest to save some or all of your contribution deductions for later down the line when you are making more money and pay a higher tax rate.
You do still need to claim the entire contribution amount on your annual taxes, however, the CRA will take note of the non-deducted contributions and it will be listed on your notice of assessment.
» MORE: What to know about RRSP withdrawals
What if I can’t afford to max out my RRSP contribution limit?
Your RRSP contribution limit is just the maximum amount you can contribute in that year; there is no minimum contribution required. And you don’t have to worry about losing your contribution room if you can’t use it up in any given year. That space will be carried forward to the next year.
What is the minimum age to start contributing to an RRSP?
There is no minimum age. Anyone who has employment income and files taxes in Canada is eligible to open an RRSP and make contributions up to their prescribed limit. You do not need to wait until you turn 18 like you do for Tax-Free Savings Accounts (TFSA).
What is the maximum age for contributing to an RRSP?
Once you reach the age of 71 you have until the end of that calendar year to shut down your RRSP. At this point you have three options:
- Withdraw the RRSP money (and pay income taxes on the full amount)
- Convert into a Registered Retirement Income Fund (RRIF)
- Use the RRSP to purchase an annuity
FAQs for RRSP contribution
The contribution deadline for your RRSP is 60 days after December 31st. This means it’s usually March 2nd, but could be March 1st if it’s a leap year. Any RRSP contributions made after the deadline cannot be deducted from your income until the following tax year.
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