RRSP Contribution Limit
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The deadline to make an RRSP contribution eligible for a tax deduction for the previous year is 60 calendar days into the new year.
That said, you can always contribute and elect to take the deduction in a future year. You may wish to do so if you think your income will be higher in coming years than it is today. For example, deferring the deduction to 2019 could save you more money compared to using it for 2017.
What’s the annual RRSP contribution limit and how is it determined?
The limit is the lesser of 18% of your previous year’s earned income, or the maximum annual contribution limit set by the Canada Revenue Agency (CRA). Earned income includes any money earned from employment, such as salaries, wages or tips. It also includes things like rental income and alimony. However, investment income isn’t included.
The specified limit goes up every year according to an index of wage inflation published by Statistics Canada. The limit is announced well in advance of the contribution deadline.
The chart below shows the contribution limits since 1991.
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How do you know what your RRSP limit is?
Wondering what your personal RRSP contribution limit is? There’s an easy way to find out. Just check your notice of assessment from the CRA for the prior’s year’s taxes. There’s a line laying out how much you can contribute in the following year to your RRSP. This includes any unused amounts that have been carried forward.
What’s the right amount to contribute?
How much you contribute to your RRSP in a given year is really up to you. Many people, for reasons of financial constraints, understandably aren’t able to make the full contribution. That said, there are advantages to making as much of a contribution as you can:
- You shelter the funds contributed from tax on any investment earnings.
- You can use the contribution as a tax deduction for your upcoming taxes, if you so choose.
What are the consequences of over-contributing?
It’s very important to keep track of your RRSP contributions because if you do over-contribute, you may be subject to penalties by the CRA. Individuals are permitted a lifetime over-contribution of $2,000. However, anything contributed over this limit can expose a taxpayer to fines of 1% of the over-contribution per month that the excess amount is in the RRSP.
It’s a good idea to monitor your RRSP contributions on an annual basis. This is particularly true if you have RRSP accounts with multiple financial institutions. Your RRSP contribution limit applies to all the accounts you have. In other words, you don’t get more room just because you have more than one RRSP account.
What happens to unused contribution room?
Making an RRSP contribution is only one step in the process. Rather than just having your contribution sit in cash, earning very little money, you’ll want to give some thought as to how you want to invest it.
What to do once you’ve made your contribution?
Depending on your age and risk tolerance, the mix of investments you choose will vary. That said, here are some common RRSP investments:
- Equities: Otherwise known as stocks, equities are investments in publicly traded companies. 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.
- GICs (Guaranteed Income Certificates): 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.