Got room? Learn about your RRSP contribution limits
By ATB Financial 8 March 2019 4 min read
Registered Retirement Savings Plans (RRSPs) are set up by the government to encourage you to save for retirement.
But there are limits on the amount of money you can contribute on an annual basis. That yearly limit is commonly referred to as your RRSP ‘room’.
“Generally speaking, each year you are able to contribute up to 18 per cent of your earned income from the previous year into an RRSP,” said ATB Wealth, Senior Solutions Analyst of Financial Planning, Linda Lamarche.
“However, those with a high income have a maximum dollar limit that is set out by the Canada Revenue Agency. For example, if your 2016 income was about $144,500, the maximum that would be added to your contribution room in 2017 is $26,000.”
What’s the difference between RRSP contribution limit and RRSP deduction limit?
There is a difference between your yearly contribution room (the amount you’re allotted each year for RRSP contributions) and your individual deduction limit.
RRSP deduction limit is determined by several factors, including:
- your current year’s contribution limit
- unused RRSP deductions from previous years
- pension adjustments
- pension adjustment reversals
For example, if your employer contributes to a pension plan on your behalf in 2016, your RRSP contribution room will be decreased in 2017 for that pension contribution.
You can find your RRSP deduction limit on the RRSP Deduction Limit Statement provided by the Canada Revenue Agency (CRA) on your previous tax year’s Notice of Assessment. This will give you an accurate calculation of the amount you are able to contribute this year. This information is also available by calling the CRA’s Tax Information Phone System (TIPS) at 1-800-267-6999 or accessing CRA’s online service.
RRSP contribution limit is determined when you file a tax return with the CRA. You will be allotted RRSP contribution room for the following year based on your earned income the year prior. If you don’t use some or all of your RRSP contribution room, it carries forward and will be added to your contribution room in the following year.
“Earned income is not the same as taxable income and does not include pension income, income from the Canadian Pension Plan or Old Age Security, retiring allowance DPSP [deferred profit sharing plan] payments, death benefits, income from your RRSP/RRIF or investment income,” shared Lamarche.
RRSP withdrawals can make RRSP room disappear!
“When funds are withdrawn from an RRSP there is no ability to re-contribute. You’ve lost that contribution room forever,” said Lamarche.
“This combined with the tax payable on the withdrawal serves as a deterrent for taking money out of RRSPs before retirement, resulting in a more stringent savings plan that is likely to stay in place and ensure you reach your goals.”
There are, however, some situations when assets in your RRSP can be used for purposes other than retirement and when your room will not be lost if you make a withdrawal. If you withdraw funds from your RRSP to participate in the CRA’s Home Buyers’ Plan or the Lifelong Learning Plan, you will be required to pay back the withdrawal to your RRSP according to each plan’s specific schedule, but will not lose your RRSP room. When participating in these programs, you will not be taxed on the money you withdraw, but you will not get a tax deduction for the money you repay back into your RRSP.
Take advantage of your RRSP room
Since you will receive a tax deduction from your RRSP contribution, it is most beneficial to contribute to an RRSP when you are in a higher tax bracket so you can get some relief on your tax bill. That said, if you have RRSP room but a low income or no income to deduct it from, you can still contribute to your RRSP.
“Even though this money has been deposited into your RRSP, you can choose whether or not you are going to use it as a tax deduction when you file your income tax return or save it for another year. Each year you can decide how much of the money that has already been deposited will be deducted,” said Lamarche. “This allows for immediate deferred growth within the RRSP.”
If you are unable to make a larger lump sum contribution into your RRSP come tax time, you should consider setting up Pre-Authorized Contributions (PACs) to your RRSP now. By setting up PACs to come out of your bank account bi-weekly, monthly or immediately after you receive a paycheque, you can avoid the rush before the RRSP deadline and benefit sooner from tax-deferred growth on those contributions. PACs also help develop good saving habits.
Do you have more questions about your retirement savings plan and how to best use your RRSP room? Get specialized advice and guidance from an experienced financial advisor by contacting us.