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Registered Retirement Savings Plan Explained

What is an RRSP

A Registered Retirement Saving Plan (RRSP) is a savings and investing account specifically for retirement in which you or your spouse contribute. An RRSP plan encourages Canadians to save for retirement by providing a tax break for your contribution, meaning, once you contribute money into this RRSP, you will immediately receive a tax break for that contribution. For example, if someone makes $60,000 each year and contributes $10,000 to an RRSP, they will then only be taxed on the $50,000 of their income. However, once this money is withdrawn from your account, then this money is reported as income and subject to taxation. For example, when this person withdraws that $10,000 from their RRSP, that money will then be taxed.

What is a RRSP limit? 

Contribution Limit

Like anything else, an RRSP is subject to certain rules and one of these rules is called the contribution limit. The contribution limit is concerned with the amount of money you can contribute to an account in any given year. This limit states that you can either contribute 18% of your past year’s income or a set maximum amount, whichever is smallest plus any unused contribution room you have from previous years. 

For example, Kyle is employed full-time and in 2020, he made $60,000 pre-tax. Here is what calculating his contribution limit would look like: 18% of $60,000 or $27,230, whichever is less. $60,000 x 18% = $10,800. That is less than the maximum limit of $27,230 so his RRSP deduction limit is $10,800. If Kyle makes a $6000 contribution to his RRSP, he’ll have $4,800 unused eligible contribution room so in 2021, he’ll be able to carry forward that $4,800 and add it to his deduction room. If his deduction room remains $10,800, he will be able to contribute a total of $13,000 to his RRSP ($10,800 + $4,800 carry forward=$15,600).

Deduction Limit

The RRSP deduction limit is another rule associated with an RRSP. The deduction limit is always 18% of pre-tax earnings from the previous tax year, or the amount established by the CRA, whichever is less. For example, if you earned $55,000 in 2020, your RRSP deduction limit is 18% x $55,000=$9,900. This is less than the maximum deduction limit. If you earned $155,000 your deduction limit would be capped at the max limit of $27,230 as it’s less than 18% of your income ($27,900).

In contrast to the contribution limit, the RRSP deduction limit does not include past unused contributions. It is always equal to 18% of pre-tax income from the previous tax year, or the CRA established amount, whichever is less.

 How is this limit determined?

Your contribution limit is determined by your deduction limit and any past unused contributions from previous years. An RRSPs contributions are tax deductible, which reduces your income tax. Investment earnings made while the funds are in the RRSP are also tax-sheltered, so they do not have to be included on income tax until withdrawn.

The average person does not make the maximum RRSP contribution every year. Unless you make the maximum contribution to your RRSP every year, your annual deduction limit is the same as your contribution limit.

When the contribution deadline and why? 

The RRSP tax contribution deadline is always 60 days after the end of the previous year to be eligible for a deduction for the current year. This deadline ensures your contributions are counted as tax-deductible for the previous tax year, thus reducing your overall tax burden and, more importantly, helping you save more for the future. 

March 1, 2022 is the deadline to contribute to an RRSP for the 2021 tax year. The deadline to contribute to your own RRSP is December 31st of the year you turn 71 years of age. After this point in time, you will no longer be able to contribute to your own RRSP. 

Ready to contribute before the deadline?

Reach out to one of our advisors to discuss your own RRSP options, to open a new account or make an additional contribution.