RRSP Contribution Rules

RRSP Contribution Rules

Registered Retirement Savings Plan (RRSP) are popular in Canada, and it is crunch time for Canadians with RRSP deadlines looming at the end of the month.

According to the Government Of Canada, the Registered Retirement Savings Plan (RRSP) is a personal savings plan that is registered with the Federal Government which allows you to save for your retirement. The RRSP was first introduced in 1957.

RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

As a result, at tax time, you will get a tax-relief because your taxes are computed on your gross income less your contributions, resulting in lower income taxes.

Returns earned on your RRSP investments are tax-sheltered and will not be taxed until you start to withdraw in retirement.

RRSP Contribution Limits

There are limits to the contributions you can make to your RRSP. On an annual basis, Canada Revenue Agency (CRA), stipulate the maximum amount that can be contributed.

For 2017 is 18% of earned income from 2016 up to a maximum contribution amount of $26,010 minus any pension adjustments from a employer-sponsored pension plan.

Any unused RRSP contribution room from previous years can be carried forward from year to year until age 71. The RRSP contribution room you have for the current year can be confirmed by checking the Notice of Assessment or Reassessment received from CRA for last year’s taxes.

(Source: Wikipedia)
Contribution limits are calculated at 18% of the prior year’s reported earned income (from employment or self-employment), up to a maximum. The maximum has been rising as shown in the table below. Since 2010 it is indexed to the annual increase in the average wage.

2010 $22,000                           2015 $24,930

2011 $22,450                           2016 $25,370

2012 $22,970                           2017 $ 26,010

2013 $23,820                           2018 $26,230

2014 $24,270                           2019 $26,500

 

Deadline for RRSP Contribution

Contribution can be made to an RRSP at any time. If you want to claim your tax break when filing your taxes, then you must have put in the contribution no later than 60 days after the end of the tax year, unlike TFSA Contribution Rules which cut off at the calendar year end.

 

There are four types of RRSP

According to Wikipedia there are 4 types of RRSP:

Individual RRSP: an Individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.

Spousal RRSP: a Spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse’s name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.

Group RRSP: in a Group RRSP, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced.

Pooled RRSP: legislation was introduced during the 41st Canadian Parliament in 2011 to create Pooled Retirement Pension Plans (PRPP). PRPPs would be aimed at employees and employers in small businesses, and at self-employed people.

A Few Things to Be Aware Of

While the government charges a tax penalty to withdraw funds early (10% to 30% adjusted when you file your taxes), they do make exceptions if you’re using it to buy a house or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchase loans. Also, the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity.

 

 

Don’t wait for retirement to enjoy life !!

 

 

Comments

  1. Hi Steve – interesting overview. Living in the US, I only knew a very little about RRSP’s.

    1957 is also a long time since the initial creation of an RRSP. I think IRAs in the US were in 1974 (401ks a few years later), or ~ +15 years later. – Mike

    • Hey Mike, I don’t know too much about US 401k or Roth IRA, I will have to read up on them. They seem very similar to our Canadian RRSP and TFSA.

  2. RRSP looks awesome. Although, it is like a 401 its not the same. I don’t think RRSP needs to be employee sponsored? I like how it is possible to carry over missed contributions. I wish 401 would be more like RRSP.

    • Hi DG, RRSP are a great retirement plan especially if you have a high income and need the deductions. They don’t need to be employer sponsored and yes you can carry over your missed contributions.

  3. Even though I have a DB pension I still contribute to my RRSP 🙂

    Cool, didn’t know that the RRSP was created in the 50’s. In my opinion the TFSA is a much better tool, but better yet, both of them together are great.

  4. Hey Steve!

    This is a nice summary you have here.

    Next to TFSAs, RRSPs are excellent tools to use as well! It’s nice how they have the 25k home buyers plan. That’s what my fiancé and I used when we purchased the home.

    I still need to sit down to see how much room I have left. Sometimes I lose track throughout the year especially when I randomly put in a lump sum.

    • There is so many good features about TFSA, but it is nice to have the tax deduction of the RRSP. I am in a lower tax bracket now so for me I prefer my TFSA, but for high income earners both are awesome.

  5. RRSP sounds a good tool to defer the taxes. It is similar to the 401K in US. But 401K is sponsored by employers, and the contribution limit is lower ($18,500 for 2018).

    Regarding “the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity”, that could be a drawback, as you have to move the money around. In US, once you are 70 and 1/2, a required minimum distribution (RMD) from 401K is required. The percentage is about 3.6% at the beginning, not too bad.

    • Hi Helen, The RRSP is similar with the 401k and at 72 you do have to turn it into an RRIF or annuity but in an RRIF you can hold exactly the investments you have in your RRSP. With a required minimum distribution depending when you start your RRIF. An example at age 65 it’s 4% at 72 it’s 5.4% up to age 95 and older is 20% withdrawal. There is also some other rules for example: if your spouse is younger you can use their age etc. The government always want to collect taxes !

  6. Great summary Steve.
    You also need to plan how you will withdraw from your RRSP to ensure you minimize the tax then. A nice mix of TFSA, RRSP and investment account at various stages should do the trick. You wouldn’t want any clawbacks at 65:)

    • Exactly, that is another reason I like using both RRSP and TFSA together, if done correctly they can save you on tax in retirement. Thanks for stopping by caroline.

  7. In addition to saving for retirement, it’s great that Canadians can use the RRSP when purchasing a home or furthering their education. As with the TFSA, it’s important to keep to the rules, so you are not hit with over-contribution penalties.

    Great post!

    • Good point Enoch, a 1% penalty tax per month for over contributing to a TFSA can add up. It is a nice feature of the RRSP that you can use them for education and first time home purchases.

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