While a Registered Retirement Savings Plan (RRSP) is an excellent way to ensure you save enough for your retirement years, annual contributions also help to reduce your taxes, offering either a better refund or a decrease in the amount owing, as RRSP accounts are tax-deductible. It is important to note that RRSPs are exempt from tax if the money stays in the account. If it is withdrawn, you will have to pay taxes on it at the end of the year.
You can open an RRSP at a financial institution, and the account is registered by the government of Canada. To be eligible, you must earn income (employment, self-employed net income, net rental income, and CPP/QPP all fall under the “earned income” umbrella), have a tax return filed already, and a social insurance number (SIN). You can contribute to your RRSP up until you turn 71 years of age.
As an RRSP can affect the taxes you owe to the government (or the refund you get), it’s also important to know that there is a maximum you can contribute to this account, each year.
Before we dive into the RRSP contribution limits for 2021, it’s key to understand that there are two ways the government places limits on RRSP contributions. You can either place 18% of earned income from the last tax year towards your RRSP contribution for the current tax season (for most, these numbers can be found on box 14 of your T4s); OR, you can contribute the max in yearly contribution limits for the taxation year, minus any employer-sponsored pension plan contributions.
The RRSP contribution limit for the 2021 taxation year is $27,830; the limit for 2020 was $27,230. Looking forward, the limit for the 2022 tax season will be $29,210. RRSP contributions for 2020 can be done within the first 60 days of 2021, and the deadline to do so is March 1, 2021.
While there are limits, those looking to maximize their RRSP contributions do have leeway in the form of “unused” or “carry forward” room. This is unused RRSP contribution amounts after 1990 that can be claimed in another year. If you are in a position where you can’t “top off” your RRSP contribution for this year to reach your limit, don’t sweat it; you can make up this difference during another tax season.
In fact, you can find out how much “unused” RRSP contributions you have by simply looking at your most recent tax return. After the Canada Revenue Agency (CRA) processes your tax return for the year, they will send out a document known as the “Notice of Assessment”. In this, you can find the RRSP contribution limit for the next year, as well as the “carry forward” amount.
At the end of the day, ensuring you can hit your RRSP contribution limit, even if it means doing so in a subsequent year, is truly a win-win situation. You have the money you know that is saved for retirement, and you get relief in the form of a tax refund or reduction of your tax bill.