Whether you’re an RRSP veteran or new to that world of Registered Retirement Savings Plans, we’ve got current hands-on information for you, including the 2019 RRSP Contribution Limit and Deadline.

We’ll break down a few practical considerations, so that, if this is your first foray into RRSPs, you’ll understand what really counts the most, as you get ready 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 an RRSP account at a bank or financial institution, and your deposits, known as tax-deductible “contributions” to your RRSP account, allowable up to certain deduction limits, will reduce your current taxable income, thus reducing the taxes you owe this year. Those RRSP funds, including investment income, will remain tax-free until you withdraw them.

What are the benefits of an RRSP?

RRSPs benefit you immediately, on your Tax Return, with a potential refund, and will provide you with an income during retirement. Plus, that money is growing, also tax-free, further increasing your retirement income.

What is the RRSP Deadline for 2020?

You have until February 29, 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 March 1. 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 February 29th, the contributions will only help your tax bill next year.

What is the maximum RRSP Contribution?

Your 2019 RRSP limit for contribution is 18% of earned income, up to a maximum contribution of $26,500.

Check your most recent Notice of Assessment, or on 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.

It will be reduced by contributions you have made to a sponsored or company/employer pension plan; an amount known as your Pension Adjustment (PA), indicated on your T4 type slips.

How does an RRSP Contribution Help Your Tax Return?

Your RRSP contribution reduces your Taxable Income right away, which determines how much Income Tax you must pay.

During retirement tax years, your income will probably be in a lower tax bracket, making all those RRSP contributions generate less income tax than they would have, during higher income years.

What If I Have a Spouse?

If you have a spouse earning significantly less than you, that spouse’s contribution limit is lower than yours. You can add to a spousal RRSP, staying within your contribution limit (for both RRSPs), thus increasing the value of your spouse’s retirement account. And, because you’re in a higher tax bracket, you are getting the better RRSP deduction than your spouse would, from their lower tax bracket.

Both tax profiles will benefit again when either one or both of you, are ready to withdraw RRSP funds. Those same contributions, split into the two spousal accounts, will result in lower income taxes (two small withdrawals being taxed, rather than one larger withdrawal).

Is there a penalty for Over Contribution?

You can over-contribute to your RRSP without an official penalty, up to $2000 (although you won’t receive a tax deduction for the over-contribution). If it’s more than that, you will incur a 1% monthly penalty, although you can apply to have that waived, and there are specific steps required to “remove” that unless it’s beneficial to leave it there until the next tax year.

How much do you save on taxes with RRSP?

You will save anywhere from approximately 15% to 30% of the dollar amount, of your RRSP contribution.

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.

What’s the difference between RRSP and TFSA?

Both RRSPs and TFSAs are savings accounts and both can earn interest or investment gains.

There are several important differences:

  1. RRSPs defer your income taxes, so that means, you must have earned income to reduce your income tax. That is not a requirement for TFSAs.
  2. RRSP contributions have immediate tax benefits; it reduces your tax bill right away. TFSA contributions will have no immediate tax benefits because a TFSA contribution won’t affect your tax return.
  3. 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.

The trouble is that TFSA contribution limits ($6000 annually) are much lower than RRSP contribution limits, which is not really enough for retirement income needs.

Your age affects your decision too. You can start an RRSP even as a minor, every dollar in there is worth it, and the sooner the better)! And your last RRSP contribution will be in your 71st year.

However, you must be 18 years of age to even open a TFSA account.

Both RRSPs and TFSAs are savings accounts and both can earn interest or investment gains.

There are several important differences. Please note the long-range differences also.

Facts

RRSP

TFSA

Type of account

Savings & Investment

Savings & Investment

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

Contribution Tax-Deductible Now on Tax Return?

YES

NO

Will It Be Taxed Later when withdrawn?

YES, but probably at a lower rate than now.

NO

Other Effects

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

NO OAS clawback

RRSPs benefit you now, and will very likely lower the taxes you would have paid on that money anyway. We can help turn your contribution room into that profitable tax benefit, but time is running out for this tax year.

How Can Fresh Start Help?

Let Fresh Start help you make the most of your RRSP contribution this year, with Personal Loans up to $15,000 and payment periods up to 60 months. Click here to apply now.