The right to make Registered Retirement Savings Plan (RRSP) contributions in 2020 will depend on your earned income from 2019.
That means you can contribute $27,230 and any carry-forward contribution room that you have in 2020, but to do so, you must have at least $151,000 of earned income in 2019. Your limits receive further reductions because of your pension adjustment from the previous year and the pooled registered pension plan contributions for the current one.
If you earn less than $151,000 annually, then your RRSP contribution limit is 18% of your earned income from 2019.
What Is the Definition of “Earned Income”?
Earned income is any money you receive from business or employment activities. If you rent properties, then those funds also count.
If you receive taxable maintenance or alimony, then that money counts toward your earned income levels for your RRSP contribution limits for the year.
Any rental or business losses that occur during the year will reduce your net income when calculating your total contribution limit. This rule also applies to maintenance or alimony payments that you must make.
Who Can Make RRSP Contributions?
Anyone who has contribution room in their RRSP qualifies to contribute to this savings plan. You can continue putting money up to and including the year that you turn the maximum age of 71.
Married couples and common-law partners can contribute to a spousal RRSP until both individuals reach the maximum age.
Group and Pooled RRSP options are available for some workers and self-employed individuals.
Contributors receive two primary tax advantages when contributing to an RRSP each year. You’ll save up to 29% on the amount contributed based on your income bracket, which means you’re not responsible for $29 of taxes for every $100 you contribute up to the maximum.
Then all of your investments in an RRSP receive the benefit of being in a tax shelter. You won’t pay income, capital gains, or dividend taxes on what you earn. When it is time to take a distribution from the account in retirement, you pay the marginal tax rate for your income bracket at that time.
Any withdrawals made from the RRSP do not impact the contribution room as they do with a TFSA.
It is still possible for account holders to receive a monthly Canada Pension Plan check when receiving money from an RRSP.
Contributing to an RRSP in 2020 is optional. This plan can help you to save more for your retirement with is tax-deferred status, which is why it is a helpful resource to use if you can afford to put money into it.
Christopher has an MBA from a top Canadian University and a decade of Big 5 banking experience plus another decade of marketing knowledge. She has a passion for writing about financial topics and has founded and developed the brand of Underbanked®.