This article covers how much you can contribute to your RRSP, how to determine your RRSP contribution and deduction limits, RRSP over-contribution penalties, and more.
The Registered Retirement Savings Plan (RRSP) is a key vehicle for growing your retirement savings.
Along with government pensions, workplace pensions, and the Tax-Free Savings Account (TFSA), a robust RRSP can secure the retirement of your dreams.
Read on to learn about how much RRSP you can contribute to maximize your tax savings now and the benefits and downsides of RRSP investing.
How Much RRSP Should I Contribute?
As already noted, your retirement income sources will likely include a mix of:
- Government-administered pension plans, i.e. the Canada Pension Plan (CPP) and Old Age Security (OAS)
- Employer-sponsored pension plans
- Tax-Free Savings Account
- Non-registered savings and investment accounts
How much you need to save in your RRSP would depend on how much money you are expecting from all these other sources.
For example, if you have a juicy defined benefit pension plan at work, your RRSP contribution room is reduced by a pension adjustment amount, and you may not need to contribute much to an RRSP.
How much money you contribute to your RRSP can also be determined by your retirement income needs. If you are planning for a lavish lifestyle, you will need more money, and a larger RRSP can help you achieve this goal.
Lastly, RRSP contribution needs can vary based on your age and when you started investing.
For example, if you started investing in your 20s, you may need lower annual RRSP contributions to reach your desired nest egg value compared to someone who begins to invest in their 40s.
In general, you should contribute as much as possible to your RRSP, subject to the maximum limit, your retirement income needs, and your tax planning.
How Much To Contribute To RRSP Based on Income?
To contribute to an RRSP, you must have employment income and contribution room and file a tax return. You should also be under 71 years of age.
Every year, the Canadian Revenue Agency (CRA) calculates your RRSP contribution limit as the lesser of:
- 18% of your earned income in the previous year, and
- An annual RRSP limit
The maximum RRSP contribution limits over the last few years are:
- 2023: $30,780
- 2022: $29,210
- 2021: $27,830
- 2020: $27,230
- 2019: $26,500
The maximum RRSP contribution limit in 2022 is $29,210 and is based on income earned in the 2021 tax year.
If your employment income in 2021 is $70,000, your RRSP limit in 2022 is $12,600, which is lower than the maximum annual contribution limit of $29,210.
If your employment income is $170,000 in 2021, your RRSP contribution limit in 2022 is $29,210, which is lower than the $30,600 we get when we calculate 18% of $170,000.
These calculations do not factor in pension adjustments or spousal RRSP contributions that can lower your deduction limit.
What about your RRSP contribution room?
Your RRSP contribution room for the year can be significantly higher than the annual RRSP dollar limit.
This can be due to unused RRSP contributions from previous years you have carried forward.
For example, if your RRSP contribution limit was $20,000 in 2021 and you only contributed $10,000. You carry forward the unused contribution room of $10,000 to 2022, and your 2022 RRSP annual contribution room increases by this amount.
So, if your annual contribution limit in 2022 is also $20,000, your total contribution room in 2022 is now $30,000, i.e. $20,000 + $10,000 unused RRSP carried forward.
How To Determine Your RRSP Contribution Limit or Deduction Limit
It can be a bit tricky to keep track of your RRSP contribution limit from year to year. And if you mistakenly over-contribute to it, the CRA levies a significant penalty.
You can view your RRSP contribution limit by looking at your most recent Notice of Assessment. This will have been sent to you after filing your tax return, or you can access it via your CRA MyAccount dashboard.
If you are making multiple contributions during the year, you should keep track to avoid over-contributing since the CRA information is usually updated once a year.
You can also call the CRA’s TIPS line at 1-800-267-6999 to get this information.
Benefits of An RRSP
RRSP accounts offer many benefits, including:
- Tax savings today. Your contributions are deductible from your taxable income
- Savings grow tax-free. Investment income earned remain tax-free until you begin receiving payments from the plan
- Useful for income splitting. You can contribute to a spousal RRSP to lower your overall family tax burden
- Are a bit flexible and allows you to withdraw funds to buy a house or pay for school
- Unused RRSP contribution room can be carried forward to future years
- Accepts many popular investment products such as stocks, Exchange-Traded Funds (ETFs), bonds, mutual funds, Guaranteed Investment Certificates (GICs), and even savings
- Deductions can be deferred. You can choose to deduct contributions from your taxable income in the future when your marginal tax rate is higher
- Safe from creditors. RRSP assets are protected in cases of bankruptcy. They are also protected from creditor claims in some provinces, even outside of bankruptcy
Downsides of an RRSP
Some cons of RRSPs include:
- You will pay taxes when you withdraw money from an RRSP
- Unlike TFSAs, RRSP withdrawals can’t be re-contributed, except for withdrawals under the Home Buyer’s Plan and Lifelong Learning Plan
- An RRSP must be collapsed at age 71
- How much you can contribute is limited by your employment income
- RRSP income can result in OAS clawback
- Some investment assets are prohibited from being held in an RRSP
If your income is high enough, you can contribute up to $29,210 to your RRSP in 2022. This amount does not include unused RRSP room from previous years or pension adjustments due to workplace pension plans.
An RRSP can be too large if it significantly increases your marginal tax rate in retirement. In some cases, it can be beneficial to first maximize your TFSA before investing in an RRSP.
This will depend on your deduction limit and how much money you can save. To grow your retirement pot fast, you should aim to contribute 10% to 20% of your income every year to your RRSP and other retirement accounts.
If time is on your side, you should consider investing in a diversified portfolio of stocks using an ETF. The stock markets tend to do better over the long term than cash or savings deposits.