All you need to know about: RRSP contribution limits and RRSP deduction
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A Registered Retirement Savings Plan (RRSP) is a great way of saving for your retirement. Every cent you contribute is considered an RRSP tax deduction. For example, if you make an RRSP contribution of $5,000 over the tax year, your taxable income will be reduced by $5,000. This means that you’ll pay less tax up front, and typically receive a significant tax refund (which you can then invest in your RRSP and grow your retirement fund even faster).
However, there are rules surrounding how much to contribute to an RRSP. The government limits RRSP contributions every year and also allows for taxpayers to carry forward any unused amounts to subsequent years.
So, when you’re wondering, what is my RRSP contribution room, you need to know that there is a max RRSP contribution limit and an RRSP deduction limit. The two sound similar but it’s important to understand the difference. If you contribute more than the RRSP contribution limit, you could face big penalties and have to submit time-consuming paperwork.
What is the RRSP deduction limit?
When people ask themselves, how much should I contribute to my RRSP, they’re often unaware that the maximum RRSP contribution is different for each person. However, you don’t need an RRSP calculator to work out the RRSP deduction limit, it’s pretty straightforward.
The RRSP deduction limit is the lesser of 18% of your gross income or that year’s maximum RRSP deduction limit, which for 2020 is $27,230 (and will be $27,830 for 2021). It’s really important to understand that any contributions you make to company RRSPs will also go towards your RRSP deduction limit, and any pension adjustments you may have could also have an impact.
Many Canadians can’t afford to max out their RRSP deduction limit, so they are allowed to carry any unused amount over to the following year. This is where the RRSP contribution limit comes into play.
The maximum RRSP contribution
Canada Revenue keeps constant track of your RRSP contributions and is aware of the maximum RRSP contribution you can make in any given year. Here’s how it’s worked out:
Your RRSP deduction limit for that year (typically 18% of your salary)
The unused RRSP contributions from all qualifying previous years
Your maximum RRSP contribution limit
You can only carry forward any unused RRSP contributions from years in which you earned enough money to pay tax. So, if you haven’t made many RRSP contributions during your working years, the difference between your RRSP deduction limit and your RRSP contribution limit could be quite significant.
RRSP contribution limit calculators
There are plenty of RRSP contribution limit calculators available in Canada, including the RRSP calculator from Wealthsimple and an RRSP calculator from CalculConversion–both are easy to use. However, you don’t actually need an RRSP calculator in Canada to work out your maximum RRSP contribution.
Firstly, here are two examples of how to calculate your RRSP deduction limit:
Ahmed earns $70,000 per year
What is his RRSP deduction limit?
$70,000 x 18% = $12,600 (well below the maximum RRSP deduction limit of $27,230)
He makes a $5,000 RRSP contribution.
He is able to carry over $7,600 to next year
If his maximum RRSP deduction limit remains the same, his RRSP contribution limit for the following year will be $12,600 + $7,600 = $20,200
Françoise earns $155,000 per year
What is her RRSP deduction limit?
$155,000 x 18% = $27,900
This is above the maximum RRSP deduction limit ($27,230), so the most she can contribute is $27,230
She makes a $25,000 RRSP contribution.
She is able to carry over $2,230 to next year
If her maximum RRSP deduction limit remains the same, her RRSP contribution limit for the following year will be $27,230 + $2,230 = $29,460
These are fairly simple examples, designed to explain how you can calculate your RRSP contribution limit, and they assume no carry-over from previous years. There are a number of ways to find out your precise RRSP contribution limit.
After submitting your tax returns, you should receive a notice of assessment from the CRA, which includes details of your RRSP contribution limit for the following year. Alternatively, you could sign up for a CRA My Account, which will contain all details of your RRSP contribution limit, call the Tax Information Phone Service, or speak with your accountant.
What happens if you go over your RRSP contribution room limit?
There are harsh penalties for going over your max RRSP contribution, that’s why it’s so important to know what your RRSP deduction limit is. If you over-contribute by $2,000, you won’t be penalized, but you won’t receive a tax break on that amount.
If you made RRSP contributions that were more than $2,000 over your RRSP contribution limit, you need to report this to the CRA within 90 days of the tax year-end. If you don’t report it in that time, you’ll be charged a penalty of 5% of the amount you contributed above your limit, plus 1% of the over-contribution amount per month for every month that your return is late.
Even if you report the over-contribution within 90 days, you will still be subject to the 1% tax unless you write to the CRA asking them to cancel or waive the tax. You may also have to fill in form T1-OVP.
What is the age limit for RRSP contributions?
You have to stop making RRSP contributions at the end of the year in which you turn 71. If you have a younger spouse, however, you can contribute to their RRSP until the end of the year they turn 71. There is no age minimum as such, you just have to have a SIN number, employment income and pay taxes.
How you can enjoy your retirement even with low RRSP income
Some retirees find that their retirement income, even with additional RRSP revenue, is not enough to fully enjoy their retirement. In this instance, a reverse mortgage from HomeEquity Bank could provide a boost to your retirement income without you having to make mortgage payments.
You only pay what you owe when you move out or sell your home, so a reverse mortgage will help to increase your retirement income without denting it. Call us at 1-866-758-2447 to find out how much you could borrow.