RRSP Contribution – Limit, Age Criteria and Benefits of contributing in it!

To start saving for your future, establish a registered retirement savings plan (RRSP). To guarantee you maximize the RRSP Contribution advantages and avoid penalty costs, you will need to be aware of several requirements.

RRSP Contribution

An excess contribution occurs when you contribute to your RRSP (or your spouse’s RRSP) that exceeds your contribution cap. You are required to pay a monthly tax equal to 1% of the excess contribution if your contributions exceed your contribution cap by more than $2,000.

The deadline for making contributions to an RRSP for the 2023 tax year was February 29, 2024. It is usually around March 1st, although if it is a weekend, it can be later. After the deadline, contributions to your RRSP cannot be subtracted from your income until the next tax year.

How Much Tax Do I Pay on an RRSP?

A part of the money you remove from your RRSP is taxed at source, which means that some of the money is paid to the CRA before it reaches you. The amount that you withdrew determines how much tax you will pay:

  • 10% (or 5% if you live in Quebec) on withdrawals up to $5,000
  • 20% (10% for residents of Quebec) of the amount withdrawn if it is between $5,001 and $15,000.
  • 30% (or 15% if you live in Quebec) if you take out $15,001 or more.

How do I make an RRSP contribution?

Contributions to an RRSP may be made by establishing an account with a bank or credit union, among other financial institutions. 

You may quickly move money from your savings or checking account to the RRSP if you utilize Internet banking. You may also be eligible to get assistance from a financial counselor, depending on your bank.

One of your options is to make a one-time lump sum contribution to your registered retirement savings plan (RRSP) or to set up recurring payments at different times of the year, including when you are paid.

RRSP Contribution

RRSP Contribution Limit 

Only a certain amount may be contributed to your registered retirement savings plan (RRSP) each year: 18% of your total income from the previous year, plus any unused amounts from prior years, up to a government maximum that varies every year (it will be $30,780 in 2023). 

This total sum is commonly referred to as a “contribution room.” Recall that contributions to a spousal RRSP in your partner’s name go towards the contributor’s total cap, not the spouse’s cap. 

Adding a spouse to an RRSP does not increase your allowance for contributions. Since it’s the highest amount you may deduct from your taxes, the RRSP contribution limit is sometimes referred to as the RRSP deduction limit.

What is the RRSP contribution age criteria?

You have until the end of that calendar year, after your 71st birthday, to choose one of these three options:

  • Take the money out of the RRSP and pay income taxes on the whole amount.
  • Become a registered retirement income fund (RRIF) by converting your RRSP.
  • Invest the money from your RRSP into an annuity.

What if I can’t afford to max out my RRSP contribution?

There is no minimum contribution amount for your RRSP; your contribution limit is the highest amount you may contribute in a given year. You are not required to contribute the maximum amount each year, and you are not at risk of losing your contribution space should you be unable to utilize it all in a given year. 

Let’s take an example where your contribution space is $30,780 (the 2023 RRSP contribution maximum). If you make a $10,000 contribution this year, the $20,780 that is left over will be added to your yearly contribution limit for the next year. 

The sum will be rolled over to the next year. Your contribution space will keep increasing until those contributions are made (or until December 31st, the year you turn 71, whichever comes first).

Benefits of Contributing to an RRSP

RRSPs provide several advantages.

  • Contributions to an RRSP may be tax-deductible, reducing taxable income when paying taxes. This might reduce taxes and save money.
  • Investment growth in an RRSP is tax-deferred until withdrawal.
  • RRSPs are often intended to save for retirement, but first-time homebuyers may use them to pay for a qualified home’s down payment or continue their education under the Lifelong Learning Plan1.
  • By moving retirement income from the higher-income spouse to the lower-income spouse, a Spousal RRSP may minimize the family’s tax obligation.

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