The Canadian Government introduced the Registered Retirement Savings Plan (RRSP), a retirement savings vehicle for its population. There are two essential parts to consider here: individual contribution and RRSP deduction, and these come with limits. At times, these can be complex to comprehend. This article discusses the RRSP and its contribution limits.
What is an RRSP?
Created in 1957, the RRSP is a part of the Canadian Income Tax Act. It is a retirement saving and investment vehicle for individuals in the country. Here, investors can invest their pre-tax money in it and let it grow. You can open an RRSP account at a bank or any other approved financial institution.
How much can you contribute towards your RRSP?
Every year, the Canada Revenue Agency (CRA) announces an upper limit for investment in the RRSP account. The limit for 2021 is $27,230, up from $26,500 in the last financial year. The limit is subject to a maximum of 18% of your previous financial year’s income. The cutoff date is 1st March 2021 for such an investment.
For example, Laker is a salaried individual with earnings of $60,000 pre-tax for the financial year ended 2020. He invested $10,000 in an RRSP account. What would be the deduction allowed if he had no carried forward deduction balance at the beginning of the year?
Here, Laker invested $10,000 in the registered account, which is lower than the set cap of $27,230 for the year. Here, he earned $60,000 in the last financial year. So 18% of $60,000 is $10,800.
Laker can claim a maximum RRSP deduction of $10,800 for the assessment year 2021. He can carry forward the balance, i.e., $800, to his deduction room and add it to the following year’s balance limit.
What can happen if you exceed your contribution limit?
The CRA provides you three options if you exceed your contribution for the year –
- Withdraw the excess deposit and pay taxes on it
- Fill a Schedule 7 mentioning that you wish to utilize the excess contribution by carrying it forward to the subsequent financial year. It will reduce your contribution room for the upcoming year.
- Fill a Schedule 7 mentioning that you have been a part of the LifeLong Learning Plan or the Home Buyers’ Plan and the excess contribution is a repayment.
Is there any age limit for RRSP contribution?
Yes, the Canadian Government has set an upper limit of 71 years for contributing to RRSP. If your spouse is below 71, you can continue investing till they turn 71. The deadline in both cases is 31st December of the calendar year when you turn 71.
Once you or your spouse turn 71, you will have to pay the taxes (regular or marginal) on the accumulated sum and convert it into RRIF (Registered Retirement Income Fund).
The Bullish Takeaway
It is imperative for every individual to plan for retirement. With the RRSP, the Canadian Government has brought about a great initiative to ensure that you have enough when you call it a day. All you need to do is start small and gradually let the fund build to benefit from compounded gains in the long term.