What you need to know about RRSP contribution limits

Retirement planning can be done in many ways that can be suitable to a person’s preference, financial situation, goals, and other factors. Indeed, it is essential for everyone to come up with a plan to successfully enjoy their retirement years.

Not everyone was able to do this during the earlier years at work, that is why the federal government imposed a retirement savings plan. In Canada, one of the helpful tools is the Registered Retirement Savings Plan (RRSP).

In this article we will talk about how to make the most out of an RRSP, RRSP contribution limits, and other details that go along with it.

How does the RRSP contribution limit work?

To assist Canadians in preparing for retirement, the government regulates Registered Retirement Savings Plans (RRSPs). With RRSPs, people can make pre-tax contributions that grow tax-deferred until they are withdrawn in retirement. This means that your taxable income for the year is reduced by the contributions you made, lowering your current tax obligation.

The highest amount you can contribute to an RRSP account while still receiving tax benefits is known as the RRSP contribution limit. It is based on a percentage of your gross income and is calculated by your earned income, up to a yearly cap that has been set by the government.

How are RRSP contribution limits calculated?

Your RRSP contribution limit is determined by a number of criteria. Your earned income from the prior year, any pension adjustments, and any unused contribution room from prior years are all considered in the formula.

Your annual notice of assessment from the Canada Revenue Agency (CRA) specifies your allowed RRSP contribution amount for the following year.

Earned income

The government takes your earned income from the previous year into account when determining your RRSP contribution maximum. This covers earnings from job, self-employment, and rentals, among others. However, it excludes revenue from sources like pension plans or losses from rental properties.

Pension adjustment (PA)

Your RRSP contribution limit is affected by the Pension Adjustment (PA) if you participate in a workplace pension plan. Your employer's pension plan benefits that you have earned are used to determine your PA.

Unused RRSP contribution room

You may carry forward any unused contribution room if you have not always made the maximum allowed contribution to your RRSP. This enables you to make up for contributions you missed in the past by making more than the annual maximum in a particular year.

To simplify how RRSP contribution limits are calculated, use this formula to determine your contribution room for the current year:
 

Contribution Room = (18% of previous year's earned income) - Pension Adjustment + Unused Contribution Room from Previous Years

What is the maximum RRSP limit in Canada?

The yearly contribution limit is determined by the CRA based on a number of variables, including your income and pension adjustments. Remember that this restriction may change from year to year.

Your maximum RRSP contribution amount is determined by a portion of your earned income from the prior year. According to the most recent update, you can contribute up to an annual maximum of 18% of your earned income to an RRSP. However, there is also a strict limit in place, and it is updated yearly.

Even if you do not contribute the maximum amount allowed, your RRSP contribution area grows over time. This implies that you may carry over any unused contribution room to upcoming years if you did not contribute the maximum in prior years.

What is my RRSP contribution limit?

One way for you to know your RRSP contribution limit is by referring to your Notice of Assessment given by the CRA from the previous year.

Your current contribution room is stated in this document, which is a reliable source of information. You can maximize your retirement savings potential and avoid fines by calculating your RRSP contribution limit.

How do I find my RRSP contribution limit?

 Here are the different ways you can find your RRSP contribution limit:

• Notice of Assessment: as mentioned above, the CRA will send you a Notice of Assessment following the submission of your tax return. In this document, you will see the “RRSP/PRPP” section where your contribution limit for the year is listed.
• My Account: on the CRA’s website, you can access your personal tax information through “My Account.” Once logged in, you can view your RRSP contribution limit and any unused contribution room from previous year/s.
• MyCRA mobile app: you can conveniently check your RRSP contribution limit, tax information, contribution room on your smartphone or tablet using this app.

Having access to your important tax information at all hours can be helpful. Check out MyCRA mobile app. #askaCPA #tax #CRA #NOA #RRSP #TFSA #fileontime #payontime #filingstatus pic.twitter.com/Bq5dENWdq8

— Sharon Perry, CPA, CA (@sjperryCA) February 17, 2022

• Tax package: your annual RRSP contribution limit may be included in any tax documents you get in the mail, such as the T1 General tax form. Remember that online sources (like My Account or the MyCRA app) are more precise and up to date.
• Contact the CRA: you can reach the CRA online, by chat, or by phone.

Can I contribute more than 18% of my income on RRSP?

It is a common misconception that you can only contribute up to 18% of your annual income to an RRSP. Although the 18% statistic is significant, it does not provide the full picture. Your earned income and the RRSP deduction limit are used to determine the actual contribution cap.

What is the RRSP deduction limit?

Your RRSP deduction limit is the most you can contribute to your RRSP while still being eligible for a tax deduction. The limit is determined using your earned income, accounting for pension adjustments, prior service pension adjustments, and other variables.

Factors Affecting RRSP Contributions

1. Earned Income

Your RRSP contribution limit is mostly influenced by your earned income. This includes earnings from jobs, business ventures, rental income, and other permissible sources of income. The more money you make, the more you can contribute to your RRSP.

2. Pension Adjustment

Your pension adjustment (PA), if you participate in a pension plan offered by your employer, will impact the amount you can contribute to an RRSP.

3. Contribution room

The amount that people can contribute to their RRSPs is capped each year by the CRA. Keep track of any unused contribution room from prior years so that it can be carried over and used to make larger contributions in the future.

4. Employer-sponsored pension plans

For those who have access to employer-sponsored pension plans, it is important to think about how RRSP contributions would affect those plans. RRSP contribution limits may be impacted by pension revisions, so thoughtful planning is required.

5. Age and retirement goals

Age plays a key role in RRSP contributions. Younger people may put other financial objectives ahead of retirement savings. Those who are getting close to retirement may wish to maximize contributions to guarantee a pleasant retirement.

6. Spousal contributions

By taking spousal RRSP contributions into account, couples can maximize their retirement savings. This plan involves making contributions to the lower-earning spouse's RRSP, which may result in tax benefits upon withdrawal.

7. Tax implications

An RRSP contribution can lower taxable income because it is tax deductible. However, when planning contributions, one must consider the tax implications of withdrawals made during retirement.

8. Investment opportunities

The investments made in an RRSP can affect how much it grows. Investments that are diversified and well-managed have the potential to produce better returns, which is advantageous for the RRSP's overall value.

9. Government policies

Changes in governmental policies and laws may impact the taxation, withdrawal requirements, and contribution limits for RRSPs. Making the most of one's RRSP depends on staying updated on these changes.

10. Economic conditions

The real value of RRSP contributions can be affected by various economic factors, including interest rates and inflation. It makes sense to adjust contributions in accordance with current economic conditions.

11. Debt and financial obligations

High debt burdens and other monetary obligations could make it difficult for someone to make RRSP contributions. Financial security over the long run depends on finding a balance between debt payments and retirement savings.

12. Life events

Marriage, divorce, and childbirth are just a few examples of life events that may have an impact on RRSP contributions. One's financial priorities might shift because of these situations, requiring adjustments to contribution plans.

13. Market volatility

Market volatility might affect RRSP investments. Protecting the value of the contributions requires knowing how to manage and handle market changes.

14. Long-term financial strategy

Contributions to an RRSP should complement a person's long-term financial plan. This involves considering additional retirement savings options and ensuring retirement planning is comprehensive.

Is there a lifetime limit for RRSP contributions?

Given that RRSP provides great benefits, here’s a question that often comes up: is there a lifetime limit for RRSP contributions? The answer is no. Unlike other retirement plans and savings, RRSP does not have a fixed lifetime contribution threshold. Due to this feature, RRSP has been an attractive option for individuals aiming to build large retirement savings.

Although there is no lifetime limit, there are definite benefits to making the most of your RRSP contributions while you are still in the workforce. Some of them are:

Tax benefits

Your taxable income for the year that you make your RRSP contributions is reduced since RRSPs are tax deductible. You may even be eligible for a tax refund by making the maximum contribution.

Compound growth

Your investments will increase gradually through compound interest if you start making RRSP contributions early and consistently. Over time, this may result in exponential growth, which will help your retirement funds expand.

Financial security in retirement

You can have the financial stability you want throughout retirement if your RRSP is well-funded. You can make sure that you have a sizable retirement fund to maintain your lifestyle once you quit working by continuously making the maximum contribution.

Strategies in using your RRSP contributions to its maximum potential

Here are some strategies to consider if you want to maximize your RRSP contributions:

• Contribute regularly: Rather than making one large payment at the end of the year, you can benefit from dollar-cost averaging, which may eventually result in higher returns.
• Utilize carry forward room: If you have not used up all your RRSP contribution room in previous calendar years, you can carry it forward. This allows you to make higher contributions when your financial situation allows.
• Coordinate with employer plans: If your employer has a program for matching contributions, aim to make enough RRSP contributions to fully benefit from their matching offer. In basic terms, it is free money that helps you increase your retirement savings.
• Prioritize years of high income: In years of greater income, think about increasing your RRSP contributions to take advantage of the accompanying tax deductions. This can be especially beneficial in higher tax brackets.
• Select spousal contributions: If there is a sizable income gap between you and your spouse, making spousal RRSP contributions can help balance your retirement income and may even result in long-term tax savings.

Now that you have an idea about RRSP contribution limits and how these limits are calculated, you can make concrete decisions that align with your financial goals.

While RRSP offers great benefits, it is still best to have a diversified portfolio of retirement savings to secure your financial future. Along with it, keep learning about retirement planning, investment, and other financial related matters. 

Were you aware of RRSP contribution limits? Did you find this information useful? Let us know in the comments: