Whether you’re an RRSP veteran or new to the world of Registered Retirement Savings Plans, we’ve got all the information you've been looking for on the 2019/2020 RRSP contribution limit and deadline.

If this is your first foray into RRSPs, we break down a few practical considerations to help you understand what really matters as you prepare to make your RRSP contribution.

For RRSP veterans, we’ve updated the details that affect your contributions.

How does an RRSP work in Canada?

Open an RRSP account at a bank or financial institution, and your deposits—known as tax-deductible “contributions”—will reduce your current taxable income. Your deduction limit—also known as your contribution room—is the maximum amount that you can contribute to your RRSP that will reduce your tax for that year. Those RRSP funds, including investment income, will remain tax-free until you withdraw them.

What are the benefits of an RRSP?

The Canadian government encourages and incentivizes saving for retirement. Besides the fact that RRSPs eventually provide you with an income during retirement, they can benefit you immediately with a potential refund on your tax return. Plus, thanks to compound interest, that money you save for retirement is growing (tax-free!), further increasing your retirement income.

During retirement, your income will probably be in a lower tax bracket. By using tax-deferred RRSPs, you won't pay anything on your contributions (or compounded gains) until you withdraw the money. And by the time you withdraw the money, you'll be taxed in a lower bracket.

What is the RRSP deadline for 2020?

You have until March 2, 2020 to make your RRSP contributions for the previous calendar year.

Don’t worry, there’s still time, but not much!

You don’t need to file your income taxes just yet, but you do need to have that RRSP account opened, with funds registered by the end of February. You just need to put the money in the account, RRSP investment decisions about those funds can be made later. If you make your contribution after March 2nd, the contributions will only help your tax bill next year. That's right, your unused contribution room carries forward!

What is the maximum RRSP Contribution?

Your 2020 RRSP limit for contribution is 18% of earned income, up to a maximum contribution of $27,230.

Check your most recent Notice of Assessment or log onto your CRA account to find your maximum contribution. It can vary each year, as it’s based on your taxable income plus any unused contribution room from previous years.

Your limit will be reduced by contributions you have made to a sponsored or company/employer pension plan⁠—known as your Pension Adjustment (PA)⁠—as indicated on your T4 slips.

How does an RRSP contribution help your tax return?

Your RRSP contribution should reduce your taxable income, meaning you could get a tax refund every year. This is because the amounts contributed to your RRSP will reduce your net income for tax purposes. The refund amount will depend on the province you live in. 

For example, if you pay all the income tax that you owe for the year but also contribute several thousand dollars towards your RRSP, you'll get a refund on tax paid because your net income has been lowered by the contribution.

How much do you save on taxes with RRSP?

The two factors that influence how much you’ll save are your income and your income bracket. Since higher income brackets have higher tax rates, the higher your tax bracket, the more a deduction counts. It reduces your income in that tax bracket, and you’ll save even more if your contribution brings you down a tax bracket.

Let’s say your taxable income is $55,000. That amount is taxed at different rates.

The first $45,000 (approximately) is taxed at about 15%, totalling about $6750 in taxes.

The remaining $10,000 of your taxable income will be taxed at about 20% federally, adding about $2000 more to your income taxes, making the overall total taxable, around $8750 ($6750 + $2000). This does not include any deductions or income that may apply in any tax return.

In this example, a $10,000 contribution into an RRSP immediately reduces your taxable income to $45,000, which means that any taxes you owe, will only be charged at 15% federally, as you’ve dropped into a lower tax bracket.

Plus, you save $2000 in income tax for the $10,000 RRSP contribution.

Extra tax savings also come later, in retirement, as you withdraw that income if you are likely to be in a lower tax bracket.

Read more: Should You Get an RRSP Loan to Maximize Your Contribution Limit?

What if I have a spouse?

If you have a spouse earning significantly less than you, that spouse’s contribution limit will be lower than yours. You and your partner can open a spousal RRSP to enjoy tax savings. This type of retirement savings account lets a couple split their retirement savings so that they both pay income tax at a lower marginal tax rate.

Is there a penalty for excess contribution?

You can over-contribute to your RRSP by up to $2,000 without an official penalty (although you won’t receive a tax deduction for the excess contribution). If it’s more than that, you will incur a 1% monthly penalty, although you can apply to have that waived.

What’s the difference between RRSP and TFSA?

Both RRSPs and TFSAs are savings accounts and both are good options for earning interest or investment gains.

There are several important differences:

  1. RRSP contributions have immediate tax benefits: RRSP contributions reduce your tax bill right away. TFSA contributions will have no immediate tax benefits.
  2. RRSP contributions and investment gains will be taxed later when it’s withdrawn, although there are ways that can be reduced significantly. TFSA investment gains will never be taxed as income, not even when you withdraw them.
  3. There is no maximum age limit on a TFSA: The age limit on contributing to an RRSP account is 71 years old. However, you must be at least 18 to open a TFSA account. 

Unfortunately, TFSA contribution limits ($6000 annually as of 2020) are much lower than RRSP contribution limits, which means a TFSA is not really a suitable for retirement planning.

To help you decide on an RRSP or TFSA, we noted a few of the most important differences in the table below.

Facts

RRSP

TFSA

Age

NO minimum, Max: 71 yrs old

Minimum 18 yrs old

Funds

  • Must be earned income.
  • MAX: 18% of previous year annual earned income minus your PA

OR

  • MAX $26,230 (whichever is less)
  • PLUS unused contributions
  • Any source of funds
  • MAX: $6000/yr

Is Contribution Tax-Deductible Now?

YES

NO

Taxed Upon Withdrawal?

YES, but probably at a lower rate than now.

NO

OAS Clawback

OAS clawback if your income is above approx. $70,000

NO OAS clawback

RRSPs benefit you now and usually help lower the taxes you would have paid on that money anyway. So start planning today for a brighter future!



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