How much can I contribute to an RRSP?
RRSP contribution limits
An RRSP gives you tax breaks while you're working and when you retire. But there are limits to the Canada Revenue Agency's generosity.
You may contribute to your RRSP until December 31 of the year in which you reach age 71. The amount you can contribute is determined by the "earned income" you report on your tax return.
Your new annual contribution room is 18% of your previous year's "earned income", up to an annual limit.
|Year||Maximum RRSP Contribution|
But this room is reduced if you belonged to a pension or deferred profit sharing plan (see your T4 slip from your employer). And it is increased in some situations too. For example if you did not use your RRSP contribution room fully in past years, or you received certain amounts like severance, a retiring allowance or foreign pension plan payment, or you recently left your group pension.
If you go over this limit, you are penalized 1% a month on the excess amount. Although, up to $2,000 can be overcontributed during your lifetime without penalty, if you expect to deduct that in future years.
Information about the amount of contribution room you have available is noted on your annual Notice of Assessment from the Canada Revenue Agency (CRA). If you're unsure of your contribution limit, it's available from the CRA by calling at 1-800-267-6999.
Annual contribution deadline
To use an RRSP contribution as a tax deduction in 2015, you must contribute to it during 2015 or in the first 60 days of 2016. (If you turned age 71 in 2015, you have only until December 31, 2015 to contribute to your own RRSP - but spousal RRSP contributions might be possible afterwards, if your spouse is not yet age 71.)
Contribution carry forward
If you do not make your maximum annual RRSP contribution, any unused portion is automatically brought forward, so you can use it in any future year(s).
Using your RRSP deduction wisely
Once you have contributed, you are free to explore rules to make the most of your RRSP deduction.
You can choose not to deduct your entire contribution right away. Saving a tax deduction to use later might have its advantages:
- Your money grows in a tax-sheltered environment, while you wait to use your tax deduction.
- If you wait to deduct some or all of this year's RRSP contribution, you might get more tax savings than deducting it all this year.
Let's look at some examples.
Example #1: Full deduction
Assume your annual taxable income is $46,000 and you have unused RRSP contribution room of $15,000. Let's assume you just got $15,000 cash. You can contribute it to your RRSP and deduct the full amount this year. If you do, your income tax savings is approximately $3,477.
Example #2: Partial deduction over multiple years
Let's instead suggest putting the $15,000 now into your RRSP, but deducting it over several years. If your annual income stays the same, deducting $5,000 per year over three years saves approximately $4,098 total income tax. That's $621 more compared to using the entire tax deduction immediately. You save more tax because smaller deductions over three years keeps your earnings below the start of the higher tax bracket for all three years.
Example #3: Postponed deduction
Sometimes it makes sense to postpone deducting your whole RRSP contribution. Say you just started a job mid-year. Next year you'll be taxed on a whole year's salary, but this year your income will be relatively low. You can start saving some of your new salary right away, but using the whole RRSP deduction next year could save you a lot more tax.
Example #4: Accelerated deduction
While it makes sense to sometimes postpone an RRSP deduction, the opposite can also be true. Let's say your taxable income will drop next year, for example because you're starting a business or going part-time. Topping up your RRSP now when your taxable income is high, and completely using your available RRSP deduction room might save you much more tax than contributing later.
We suggest you check with your tax advisor or your Vancity investment professional before electing to carry-forward RRSP deductions.