RRSP Contribution Limit calculator

How to find your unused RRSP contribution room?

If you’re unsure how much RRSP contribution room you have (or if you have any at all), you can look it up easily through the CRA website or consult your most recent tax forms. 

You can also look at your RRSP deduction limit from the previous year and subtract from that the contribution you made this year to arrive at your contribution room. For example, if your RRSP deduction limit at the start of 2021 was $40,000, and you contributed $5000 this year, your total contribution room would be $35,000.

What happens if you over-contribute to your RRSP?

In the event that you over-contribute, you’ll likely get off easy - providing your contribution doesn’t go over the limit by too much.

In cases of over-contribution by $2000 or less, the CRA won’t penalize you, but those extra funds won’t be tax-deductible. If you over-contribute by more than $2000 (even if it’s just a few dollars), you’ll receive a warning letter from the government advising you to get rid of the offending amount. If you fail to do this, you’ll be penalized 1% of the extra money each month you allow it to stay in the account. And, if you fail to pay those penalties on time, you’ll also get hit with much-higher late fees, compounding what you owe. 

In the case of an innocent mistake, however, you can always apply to have the penalties waived.

Setting up an RRSP

Most employers offer what’s called a Group RRSP. These are funded by deductions from you and your co-workers’ paycheques, similar to how a 401K works in the United States. In some cases, your employer may even match a percentage of your contributions (typically 1-5% of your salary). In this case, it’s wise to contribute enough to force your employer to pay the maximum, as you’ll essentially be getting a free boost of funds. If your workplace doesn’t currently offer this (or if you’d like a separate RRSP in addition to the one offered by your employer), you can always set up an RRSP on your own with your chosen financial institution. Typically, there are two options you can choose from:

Spouse or common-law partner RRSP

Spouse or common-law partner RRSPs are perfect for couples who want to split their retirement income equally, especially if one partner earns a higher annual income than the other. In a case such as this, the higher-earning partner will contribute for both parties and receive a tax deduction, while their counterpart will be able to equally share in the eventual retirement income down the road. 

Approved investments for RRSPs

RRSPs allow for a wide variety of investments and assets. These include:

• Equities: This can take the form of a large basket of stocks in a mutual fund, index fund, exchange-traded fund (ETF), or even individual stocks if you have the knowledge and ability to pick them.
• Guaranteed investment certificates (GICs): If you’re very risk-averse, you might want to consider this deposit product. They pay a fixed interest rate and are almost always insured by the government.
• Bonds: Part of the fixed-income family of investments, bonds are loans to companies or governments. Depending on the financial health of the entity borrowing the money, they can pay either high or low rates of interest. As a general rule, the higher the interest rate on the bond (vs. other borrowers), the riskier it is. There are also bond ETFs and mutual/index funds.
• Mutual funds
• Savings accounts
• Mortgage loans
• Income trusts
• Foreign currency
• Labour-sponsored funds

What happens to an RRSP once you retire?

When you turn 71, your RRSP must either be liquidated or turned into a Registered Retirement Income Fund (RRIF) which will provide you with regular monthly payments based on the level of funds in your RRIF which are taxed according to your marginal tax rate. 

For example, if you’re 71 years old and have $600,000 of retirement savings, your RRIF will pay out $2,640 per month. If this is your only source of income, you’ll be taxed at a marginal rate of 12%, leaving you with 2,323.20 per month.

RRSPs vs. TFSAs

While both RRSPs and TFSAs can function as retirement savings funds, which one you should choose largely depends on your current financial circumstances and plans for the future.

Because RRSP contributions are tax-deductible but its withdrawals are taxable, they’re better suited towards someone currently making a high income who expects to be living off less once they retire. A person like this can use their current RRSP contributions to reduce their taxes each year, then pay less tax on their RRSP income once they’re retired and in a lower tax bracket. While their RRSP may not have a lot of flexibility due to its taxable withdrawals, it’s most likely not a concern as they won’t need access to the money as it grows.

TFSAs, on the other hand, are the opposite. Withdrawals from a TFSA are tax-free, but contributions are subject. This means you’ll be paying taxes on your deposits while you’re young and contributing, but can take money out for free. In this way, TFSAs are perfect for those in a lower tax bracket who expect to be making more money as they get older (i.e. small business owners or entrepreneurs). If you have to pay tax, you might as well do so when you’re in a lower bracket and the hit isn’t as hard. TFSAs also have the added benefit of liquidity, meaning you can withdraw money from the account at any time as needed (check your TFSA limit here).

That being said, there’s no rule against having both, and a TFSA can make an excellent counterpart to an RRSP if you’ve got the ability to regularly contribute to each.