Every year Canadian taxpayers that are under the retirement age of 71 years can deposit funds into an RRSP (Registered Retirement Savings Plan). Any income earned on these funds is tax-free provided you keep the funds in the RRSP until retirement. What’s more, you can also deduct these contributions from your income when calculating your tax liability – your RRSP deduction.
You can have a personal RRSP that you contribute to, and a spousal RRSP that you both contribute to.
Contributing to your RRSP is a real win-win as it allows you to save for your future tax-free and reduce the amount of tax you pay now.
There is a limit to the amount that you can both contribute to your RRSP and deduct from your taxable income each year. The former, your RRSP Contribution limit, has several factors that you need to consider before reaching the final number. The latter is your RRSP deduction limit which is set by the Canadian Revenue Agency (CRA) each year.
Understanding your RRSP deduction limits and contribution limits can seem a bit daunting, but we will lay out the fundamentals for you here and help simplify everything for you.
What is the RRSP deduction limit?
Your deduction limit is the base amount that you can contribute to your RRSP (before other factors are included: see below) which can then be deducted from your income to calculate your taxable income for that year.
Your personal deduction limit is the lesser of either 18% of your pre-tax income from the preceding year, or $27,830 (CRA’s maximum for 2021).
This may seem a little complicated so let’s look at an example to clarify:
If your annual salary is $50,000 then your RRSP deduction limit will be $9,000 (18% of $50,000). This is less than the CRA rate of $27,830, so $9,000 is your deduction limit.
Alternatively, if your annual salary is $200,000 then your RRSP deduction will be the CRA maximum of $27,830. 18% of $200,000 is $36,000, which is higher than the CRA maximum, so you would defer to their number.
What is the RRSP contribution limit?
Your contribution limit, on the other hand, can differ from your deduction limit as it also takes into account:
- any unused contributions from previous years
- any contributions that your employer or yourself have made to your RPP
So, the maximum amount you can contribute could be more than 18% of your income if you under contributed in previous years.
This is probably best explained through an example again.
You earn $50,000 a year, so your maximum contribution for the year is $9,000. You only contribute $5,000 to your RRSP, however, leaving $4,000 in potential contributions. The following year your salary is still $50,000, so again that year’s contribution is $9,000. But you still have a $4,000 contribution available from the previous year which carries forward. So, your contribution limit is actually $13,000 ($9,000 + $4,000).
RRSP deduction limit vs contribution limit
Unless you are maximizing your contribution limit every year (which most Canadians don’t!) then your deduction limit will be less than your contribution limits each year.
This difference is important to understand as while your deduction limit will vary with your salary it will never exceed the CRA imposed limit.
How to find your RRSP deduction limit?
There are three simple ways Canadian taxpayers can find their RRSP deduction limit as, conveniently, the CRA keeps track of all your contributions each year and can readily give you this information. You can find your deduction limit:
- On your RRSP deduction limit statement (your T1028 form).
- By logging into your My Account page on the CRA website.
- By calling the RRSP Tax Information Phone Service (TIPS) hotline on 1-800-267-6999
What else should I be aware of for my RRSP?
There are a few other details around your deduction limit and your contribution limit that you should be aware of and pay close attention to. Let’s look at them here…
RRSP contribution deadline
You can find the RRSP contribution deadline on the CRA Website here. You want to make sure you have contributed as much as you can to your RRSP by the deadline in order to maximize your RRSP deductions.
What if I over-contribute to my RRSP?
Over-contribution to your RRSP comes with some penalties, so being aware of what your limits are and sticking to them is key.
You are allowed to over-contribute by $2000 each year before you begin to be penalized, but for every $2000 above that, you will be charged 1% per month (which can add up quickly!).
If you do over-contribute, you can take that money back out to bring yourself back down to your limit threshold, but it’s better to be aware of your limits beforehand in order to avoid any unwanted surprises.
What else can I use my RRSP for?
Saving for your retirement is great, and something we should all be thinking about as early as possible, and, as discussed, contributing to your RRSP allows you to save tax-free and to reduce your tax liability now.
There are other uses for your RRSP funds that can be utilized earlier in life:
Home Buyer’s Plan – This allows you to take up to $25,000 of your RRSP and put it towards the down payment if you are a first-time homebuyer. You won’t be taxed on the money you withdraw providing you pay it back to your RRSP within 15 years.
Lifelong Learning Plan – You can use up to $10,000 a year or $20,000 in total to pay for your spouse’s education (not your children’s education it should be noted). These funds are again tax-free if paid back within 10 years.
Doing your best to maximize your RRSP contributions not only benefits your future savings and retirement goals but also helps save your money now through the deductions you get on your income tax. By all accounts, this is something that every Canadian taxpayer should be focusing on as early as possible.