The RRSP contribution limit for the 2021 tax year is the lower of $27,830 or 18% of your pre-tax earnings from the previous year.
What is an RRSP?
Short for Registered Retirement Savings Plan, an RRSP is an account that Canadians can open in order to take advantage of tax benefits.
When contributing to an RRSP, total taxable income is reduced, resulting in less income tax paid.
In addition, any growth that occurs in RRSP investments are tax-free until the time of withdrawal.
What is the RRSP Contribution Limit?
Each year, Canadians are allowed to contribute a set amount to their Registered Retirement Savings Plan (RRSP).
These RRSPs are a special type of account that are registered with the Government of Canada.
Created to encourage planning for retirement, RRSP accounts are a great way to lower your taxable income while saving for the future.
Any money deposited into an RRSP will lower your taxable income for that year.
The more you contribute, the larger the tax return you can receive.
For example, an individual who makes $60,000 and contributes $10,000 will only have to pay taxes on $50,000 of their income.
The total amount Canadians are allowed to contribute is the yearly deduction limit plus any contribution room you carry forward
from the previous year.
If you do not use up your contribution room from the previous year, the Canada Revenue Agency (CRA) will allow you to save this room and use it for future years.
This amount can be carried over indefinitely, allowing you to make larger contributions later on in life when you may have more money to set aside.
The contribution limit for each individual will be different, and this amount is listed on your Notice of Assessment sent out by the CRA at the end of the year.
What is the RRSP Deduction Limit?
The deduction limit is the maximum amount you are allowed to contribute to your RRSP each year.
The limit is the lower amount between 18 percent of your pre-tax earnings from the previous year and the set maximum that is established each year by the CRA.
For the 2021 tax year, the annual limit is $27,830.
To illustrate the deduction limit, we can take a look at an individual making $60,000.
Their deduction limit would be the lower number between 18 percent of their income and $27,830.
As 18 percent of their income ($10,800) is lower than $27,830, their deduction limit would be $10,800.
This deduction limit is a general example, and there are a few exceptions that impact an individual’s limit.
For example, the deduction limit would be lower for some individuals who contribute to retirement plans through other methods like a company pension plan.
The amount contributed through other means is known as the “pension adjustment” and can be found on the T4 issued by the employer at the end of the year.
How Do I Determine My RRSP Contribution Limit?
An individual’s RRSP contribution limit is the sum of the most recent tax year’s deduction limit plus any carryover contribution room that is available from previous years.
For example, if an individual had a deduction limit of $10,000 last year and only contributed $4,000 into their RRSP, then $6,000 would be carried over and available for contribution in future years.
If their deduction limit this year was also $10,000, then their total contribution room would be $16,000 ($10,000 this year plus $6,000 carried over from last year).
That individual can choose to either contribute the full $16,000 or once again carry over this contribution room for future years.
Since the money contributed into an RRSP will lower your taxable income in that given year, it is generally a good idea to use RRSP room in years when you are earning a higher income.
For example, if you are expecting to get a new job or receive a significant raise next year, it may be a good idea to save your contribution room to maximize the benefits.
This is because earning a higher income may place you in a higher tax bracket, which means that RRSP contributions will earn you a larger tax return at the end of the year.
Is There an RRSP Age Requirement?
There are no minimum age requirements to open an RRSP.
However, individuals must have employment income and have filed taxes in order to start earning contribution room.
The maximum age for RRSP is 71.
Once you reach that age, you can either withdraw the money or convert it into a Registered Retirement Income Fund (RRIF).
Frequently Asked Questions
- What kinds of investments can my RRSP hold?
Investments that are allowed to be held in an RRSP are referred to as qualified investments. According to the CRA, the following types of investments are permitted to be held in an RRSP:
- Mutual Funds
- Securities listed on a designated stock exchange
- Guaranteed Investment Certificates
- Certain shares of small business corporations
Accounts can be opened and investments can be made through most financial institutions. Once the money is deposited, individuals can choose to either invest the money themselves (self-directed) or let others help them invest and grow their money (through robo-investing or working with an advisor).
- What happens if I contribute more than my RRSP limit?
Individuals need to pay special attention to ensure that they are not overcontributing to their RRSP. In the event that an overcontribution occurs, individuals will be required to pay a monthly 1% fee on overcontributions. To avoid this, it may be a good idea to wait until you receive your T4 at the end of the year to see what your contribution room will be and then make a lump-sum contribution before the deadline at the end of the year. This way, you can take advantage of the tax benefits and not be at risk of overcontributing and facing penalties.