If you’ve already begun saving for retirement – or have at least started exploring your options – you should know a little bit about Registered Retirement Savings Plans, or RRSPs. These investment vehicles allow your contributions to grow over time while taking advantage of tax benefits that maximize the earning potential.
As with any tool that involves tax breaks however, it’s important to understand the rules that are involved. Incurring tax penalties pretty much defeats the purpose of holding an RRSP, and doing so should definitely be avoided.
2017 RRSP Contribution Limits
As a general rule, your contribution limit on any given year is a combination of that year’s set limit, plus any room for contribution that carried over from previous years. Like “rollover minutes” on a cell phone plan, any amount that you could contribute carries over from year to year if you fall short of the total limit.
If in 2016 you were allowed to contribute $9360, but only contributed $6000, then your 2017 limit will be increased by an additional $3360. The remaining amount that you could have contributed during the previous year carries over.
The base contribution limit for 2017 is 18% of your earned income as reported on last year’s tax return. Simply add any carried-over limit to this amount and you will be able to determine your total contribution limit for 2017. (Note: the CRA includes both the annual limit and any carried-over contribution room on your notice of assessment.)
RRSP and Employer Plans
Take note that an employer-sponsored pension plan will have an effect on your RRSP contribution limits. The amount of impact will be determined by your pension adjustment as reported to the Canadian Revenue Agency by your employer. Your pension adjustment can be found on the form T4 that’s filed each year. If you’re enrolled in a defined contribution registered pension plan (RPP) or defined profit sharing plan (DPSP), the adjustment will be a total of the contributions made by both you and your employer. More information about pension adjustments can be found here: CRA & Pension Adjustments
RRSP Age Limits and Restrictions
There are a few age-related factors to consider, we highly recommend obtaining help from a financial advisor before turning 71. While you can contribute to an RRSP up until the year you turn 71 (the cut-off day is December 31 of that year), you must take action by that time to ensure the entire value of the RRSP is not taxed. Before the cut-off date, you must use the funds to purchase an annuity or roll it into a Registered Retirement Income Fund (RRIF).
Note: According to the CRA website, the same age restrictions apply when contributing to a spouse’s or common-law partner’s RRSP or SPP. You can contribute until December 31st of the year that he or she turns 71 years of age.
Again, there are other tax-related factors that crop up around the time you turn 71, so professional guidance can be crucial to avoiding tax penalties and general inconvenience.
RRSP Tax Deduction Rules
As one might expect, there are a few rules regarding what can and can’t be deducted on your tax return. Per the CRA, the following RRSP-related deductions are allowed:
- Any qualifying contributions made to your RRSP*
- Any contributions you made to your spouse’s or common-law partner’s RRSP
- Unused RRSP contributions from a previous year
* There are a few contributions that you won’t be able to include when claiming a tax deduction, including: transfer amounts to an RRSP, repay funds withdrawn under the Lifelong Learning Plan, or repay funds withdrawn under the Home Buyer’s Plan.
The CRA also states that deductions cannot be claimed for the following:
- Administrative fees related to an RRSP or management of the same
- Brokerage fees paid when buying or selling with a trusteed RRSP
- Any interest paid when borrowing money to contribute to an RRSP
- Capital losses within your RRSP
- Employer contributions to your PRPP
The above information is provided for educational purposes only and should not be considered financial advice. The information in this article is accurate as of its writing; for complete and up-to-date information, please refer to the Canada Revenue Agency’s current RRSP guidelines.
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®.