Registered Retirement Savings Plans (RRSPs) can help you save for your retirement. You won’t have to pay taxes on contributions made to your RRSP account and all investments held within the account can grow on a tax-deferred basis.
This article will help explain RRSP contribution and deduction limits and rules for withdrawals so you can get the most out of your RRSPs.
Difference Between RRSP Deduction Limits and RRSP Contribution limits
While RRSP deduction and contribution limits are similar, there are some important differences.
Contribution limits set a cap on how much money you can contribute to an RRSP each year. Deduction limits cap how much of your annual RRSP contributions can be claimed as a deduction on your tax return.
RRSP Contribution Limits
What is your maximum RRSP contribution limit and how much can you contribute to your RRSP?
It’s important to know what your contribution limit is, as there are penalties for exceeding it.
Your maximum RRSP contribution limit is equal to 18% of any pre-tax income earned in the previous year. Any unused contribution room can be carried forward. So, if you contribute 8% of your pre-tax income, the remaining 10% of unused contribution room will be added to next year’s contribution limit. But remember that contributions from your employer also count toward your annual contribution limit.
How can you determine and calculate your RRSP contribution limit for this year?
Your contribution limit will be equal to 18% of your previous year’s income, plus any contribution room carried over, but you don’t have to calculate it yourself. The Notice of Assessment issued to you by the Canada Revenue Agency (CRA) will tell you exactly what your contribution limit is. If you don’t receive a copy of your Notice of Assessment directly, you can always access it online through your CRA My Account.
Deadline to contribute to an RRSP
You can make RRSP contributions for 60 days after the end of the calendar year. The last day to make contributions for the 2023 tax year is February 29, 2024.
Who is eligible to contribute to an RRSP?
Any Canadian resident can contribute to an RRSP provided they have a Social Insurance Number, they earned an income in the previous year, and they file a tax return in Canada. There are no minimum age requirements for contributing to an RRSP, however, some financial institutions may require customers to be the age of majority to open an account. Once your account is set-up, you can continue to make contributions until the end of the year you turn 71.
What happens when you over-contribute to an RRSP?
Excess RRSP contributions will be taxed 1% per month for every month that you’re over your limit, until withdrawn. You can avoid paying the 1% tax by withdrawing any excess contributions before the end of the month in which the contribution was made. Note, it's your responsibility to keep track of your RRSP contributions to ensure you stay within the defined limits.
Factors Affecting Your RRSP Contribution Limit
RRSP contribution limits are affected by several factors.
Earned income
Contribution limits are largely based on how much income you earn. Contribution limits are equal to 18% of any income earned in the previous year plus any contribution room carried over. Earned income includes any income earned through employment and from other assets like rental properties. However, other revenue sources, including income earned from pension plans, are excluded.
Pension Adjustment (PA)
Pension plans can also affect your contribution limit. Contribution limits are adjusted based on the estimated value of any pension earned over the course of the year. Any PA affecting your contribution limit will be shown on your T4.
Unused RRSP contribution room
Any contribution room not used in one tax year, gets carried over to the next tax year. That way you can make additional contributions in the future and not miss out on any of the benefits of contributing to an RRSP.