Usually, Canada Revenue Agency doesn’t give you many second chances. But rules on when you can contribute to RRSPs and use RRSP tax deductions are suprisingly flexible. Understanding them can really save tax!
Unused contribution room can be carried forward to use in any future year. However, you cannot contribute to an RRSP for a person (yourself or your spouse) who already turned age 71 in the previous year.
No. You can choose when to deduct them, to maximize your tax savings. Deduct them now, or in a future year, or even divide them between years.
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:
See these examples to see how waiting to deduct contributions may increase your tax savings.
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.
Yes. Many people forget they can contribute even without current earned income (for example, after retiring). If you have unused RRSP contribution room from past years and funds available, contributing to your own or your spouse's RRSP is allowed up until the end of the year the planholder turns age 71.
But watch out for special situations where contributing to an RRSP may not make sense. For example, where you'll lose eligibility for the Guaranteed Income Supplement (GIS), or your tax rate when withdrawing in retirement will be much higher than your initial tax savings. Other options, such as a Tax Free Savings Account (TFSA), might be more appropriate for your circumstances.
Meet with a Vancity investment professional who can help you create a plan to catch up on unused RRSP contribution room.
