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How Much Should You Contribute to Your RRSP?

There are just three weeks left before you can make your RRSP contribution for the 2018 tax year. But you’re probably wondering about how much money you should contribute.

There’s no simple answer because everyone’s in a different financial situation. And there are certain times when it might not make sense to make a contribution: You have a low income, you’re in a low tax bracket, you have a defined benefit pension plan, or you have high-interest credit card debt. But if none of those situations apply and you aren’t saving for retirement, you should consider contributing to an RRSP.

How much you can contribute

Your RRSP contribution (or deduction) limit depends on your income. For the 2018 tax year, the limit is 18% of your earned income or $26,230 (whichever is lower). You can probably contribute more money as unused contribution room since 1991 can be carried forward indefinitely. Your notice of assessment from the Canada Revenue Agency will show you how much room you have.

RRSP contribution limit table

If you belong to a pension at work, your RRSP contribution room will be reduced by a certain amount. This is called a pension adjustment. If you belong to a defined benefit plan, your pension adjustment estimates the value of the benefit you earned in the prior year. If you belong to a defined contribution or deferred profit sharing plan, the pension adjustment is the total amount both you and your employer contributed in the prior year. Your notice of assessment will also show your pension adjustment and the effect on your contribution limit.

If you’re 72 or older, you won’t be able to contribute to an RRSP. But you can contribute to a spousal RRSP is your spouse is younger than 72 and he/she has contribution room.

How much to contribute to your RRSP

The median RRSP contribution was $3,000 in 2014, according to the latest data available from Statistics Canada. That means half of tax filers contributed more than $3,000 while the other half contributed less than $3,000. Overall, Canadians contributed $38.6 billion to their RRSPs in 2014.

Although it’s difficult to determine the exact amount you need to have saved for retirement, the general rule is to save at least 10% of your gross salary (your salary before taxes and deductions) every year. If you start saving when you’re young, saving 10% or more may be enough. You’ll likely be set if you save the maximum amount annually. But if you only begin saving when you’re older, you’ll need to save more money every year.

There are also other factors that’ll determine how much you need to save in your RRSP. You’ll have to save more money if you want to retire early, if you want to travel often in retirement, or you prefer low-risk investments such as GICs (check out the best GIC rates).

And while many Canadians are debt-free by the time they retire, some of them still carry debt into retirement. A 2016 Equifax survey showed Canadians 65 years and older had an average debt load of $15,001 in the second quarter, an 8.2% increase over the year-ago period. Having debt in retirement means you’ll have to pay that down and have less money for your basic needs, which can be risky when you have a fixed income.

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The bottom line

Whether or not you should make an RRSP contribution depends on your financial situation. If it makes sense to start contributing, saving at least 10% of your gross salary is a good start.

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Flickr: KMR Photography