Planning for retirement is a key aspect of any financial plan. One of the best ways to make sure you have enough money to retire is by investing in a Registered Retirement Savings Plan (RRSP). Contributing regularly, you can watch your nest egg grow. Just keep in mind: it’s important to understand your RRSP contribution limit!
Knowing how much you’re able to put away every year can help you maximize this benefit — a cornerstone of many Canadian retirement plans.
Maximizing that contribution room as much as possible, year-over-year has a two-fold benefit. First, it helps you benefit from the tax savings upfront. That’s because RRSP contributions are deducted from your taxable income. If you aren’t sure what that savings means in real terms for you, use an RRSP savings calculator to plug in your specific details.
And, of course, it means you have money set aside for your retirement. That makes an RRSP one of the best savings vehicles available for retirement planning.
Bottom line: contribute the maximum every year, if possible. But, first, do you know what the maximum RRSP contribution limit is?
How do I find out what my RRSP contribution limit is?
There are a number of ways to figure out exactly how much money you can contribute to your RRSP in a specific year.
You can find your own personal RRSP contribution and deduction limit:
- On line A of your previous year’s Notice of Assessment
- By logging into your CRA My Account
- Click on the “RRSP and TFSA” tab
- Click on “RRSP,” and you will be able to see your deduction limit here
- For more information, click on the “RRSP” link
- By calling the CRA’s Tax Information Phone Service (TIPS) at 1-800-959-8281
- On Form T1028, which you will receive in the event that your RRSP deduction limit has changed since your last assessment.
What is the maximum RRSP contribution limit for the 2021 tax year?
The maximum RRSP contribution limit changes based on current government regulations and your previous year’s earnings and contributions.
For the 2021 tax year, your RRSP contribution is 18% of the income from your 2020 tax return. That’s up to a maximum of $27,830. For the 2022 tax year, that maximum increases to $29,210.
What happens if I go over my contribution limit?
You can exceed your RRSP contribution limit by $2,000 without penalty. After that, though, not only do you not benefit from any further tax deduction, but you also pay a penalty of 1% every month you are over your contribution limit. It is best to withdraw it and wait until the following tax year to benefit from that RRSP contribution.
How much should I contribute to my RRSP to avoid paying taxes?
As much as you can! If possible, contribute up to 20% of your income to your retirement savings. The more you contribute, the more you save. And the lower your taxable income is, the lower your current tax hit on your income.
As mentioned above, the RRSP contribution limit is 18% of your earned income or (for the 2021 tax year) $27,830 — whichever is lower. The exception to this rule is if you have unused contribution room from previous years. That allowance carries forward to the current tax year and the next until you max it out.
How can I maximize my RRSP contribution?
There’s more to investing in an RRSP than blindly handing money over to a financial institution and hoping they invest it wisely on your behalf. There are things you can do to maximize your investment and retire comfortably.
Contribute to your RRSP early
Don’t wait until the last second. If you wait until the deadline to invest in your RRSP every year, you miss out on a full year of that money working for you and accruing interest. Get your money in there as quickly as you can. That way it’s earning as much as possible, for as long as possible.
Furthermore, financial institutions offer pre-authorized payment plans so you can automate their contributions. Most plans require contributions of at least $25 a month. By setting up pre-authorized payments, you guarantee your RRSP contributions aren’t forgotten — with zero further effort on your part.
Contribute to your spouse’s RRSP
Spousal RRSPs are a form of income splitting. They don’t make sense for everybody, but if you are in a partnership where one person earns significantly more than the other, a spousal RRSP is a great idea.
The idea is that the spouse with the higher income shifts some of that income to the lower-earning spouse, lowering their own tax bracket and their spouses’ taxable income, while also deducting the contribution from their own taxes. However, you still need to understand your RRSP contribution limit so you don’t over contribute.
When it’s time to retire, the lower earner withdraws the funds. This means a lower tax hit than if the higher earner withdraws funds.
Forecast and withhold
While there is a yearly RRSP contribution limit, one of the great things about your RRSP contribution room is it’s not a use-it-or-lose-it scenario. Any unused contribution room carries over to the following tax year. If you have an inconsistent income, consider holding over your contribution room to a year where you earn more money and can benefit more from the deduction from your income.
Keep your hands off!
It may be tempting to withdraw from your RRSP for large purchases or when funds are tight. However, unless you have no alternative, it’s best to pretend as if that money doesn’t exist. Aside from the tax hit you take on withdrawals — as well as the interest that would have accrued had you kept it in there — you also lose that RRSP contribution room forever.
Invest for growth
Since you don’t intend to use your RRSPs until you retire, and because you start investing as early as you can, you have a bit of time for it to grow. Use that time to invest in riskier but potentially lucrative investments. As your retirement nears, it’s worth transferring those investments to more stable, reliable investment tools. But for as long as you can manage, invest that money where it will grow as much as possible.
Not sure what options you have for RRSP investments? Thankfully, there are several options to suit your individual risk tolerance and preference. They include:
- Mortgages in Canada
- Mortgage-backed securities
- Income trusts
- Gold and silver bars
- Savings bonds
- Treasury bills
- RRSP-eligible mutual funds
- Canadian and foreign stocks
Bring in the pros
Unless investing is your day job, it’s always wise to talk to a professional whose bread and butter is helping people like you manage their money. They know all of the tips and tricks to grow your funds, wisely!
Are RRSPs really worth it?
Investing in an RRSP is advantageous because your investment can grow tax-free. And while you pay tax on withdrawals, you’re typically in a lower tax bracket in retirement. The money you lose to taxes is less than if you withdraw from your RRSP while earning a higher income.
While your money is locked away in your RRSP, there are opportunities to withdraw funds without penalty.
The Lifelong Learning Plan (LLP) and the Home Buyer’s Plan (HBP) for first-time buyers are two available opportunities.
What is the Home Buyers Plan?
As it stands now, you may withdraw up to $35,000, one time and tax-free, to put towards the purchase of your first home. This helps those starting out get into the real estate market. However, you must pay it back in full within 15 years. In addition, before you can withdraw the funds tax-free, they must be in your account for a minimum of 90 days.
When repaying the funds, you make minimum contributions every year, with the exception of the first tax year after the RRSP withdrawal.
If you’re purchasing a home with someone who is also a first-time buyer, they can also take advantage of the HBP, giving you access to $70,000 tax-free.
What is The Lifelong Learning Plan?
The Lifelong Learning Plan (LLP) allows Canadians to complete or enhance their education. You can withdraw up to $20,000 from your RRSP, tax-free, over a four-year span (to a max of $10,000 per year) to pay for training or education. Funds go towards your own education or that of a spouse or common-law partner. The funds cannot be used to finance your child’s education. (Use an RESP for them!)
Unlike the HPB that allows 15 years for repayment, the LLP must be paid back, in full, within 10 years of withdrawal.
How long can I carry forward RRSP contributions?
One of the benefits of an RRSP is that any unused contribution room carries over to the following tax year. You can fill that allowance to the max every year until you reach it. The only exception to this rule is the age of the person holding the RRSP. You carry contribution room forward year-over-year, until the age maximum of 71 years old. This is when you must close your RRSP.
Age limit for contributing to an RRSP
There is no minimum age at which someone can begin investing in RRSPs. As long as you have an employment income of some sort and file a tax return, you can contribute.
While there is no age minimum, by December of the year you turn 71, you must dissolve your RRSP. At this time you’ll either withdraw the full amount and pay a withholding tax, convert your RRSP to an annuity, or convert it to an RRIF.
What is a RRIF?
RRIF stands for Registered Retirement Income Fund. Much like its name suggests, it gives you a steady income in retirement. Even better, they’re one of the most flexible and tax-effective ways of generating income in retirement.
Three reasons why RRIFs are great:
- Your money grows, tax-free
- How you invest the funds in your RRIF is totally up to you
- Withdrawal options are flexible
Your RRSP allowance is there to be used. By maximizing that contribution allowance, and taking advantage of all of the associated benefits of investing in an RRSP, you enjoy seeing that money grow in preparation for you to retire comfortably.
However, it’s important to understand your RRSP contribution limit for the 2021 tax year and beyond. This helps maximize the benefits while reducing the chances of having to pay a penalty.