If you haven’t already, you should consider opening a Registered Retirement Savings Plan (RRSP) to save for retirement. It’s an essential tool in financial retirement planning, given its many tax advantages. But do you know how much you can contribute to your RRSP each year? And do you know the difference between contribution room and the RRSP contribution limit set by the CRA? This is important information to know, to avoid paying penalties.
The Registered Retirement Savings Plan (RRSP) is a savings plan used to put money aside for retirement. First, it allows you to save tax-free. But it also allows you to reduce your taxable income and get a tax refund. Each year, you can contribute to your RRSP according to your contribution room.
RRSPs offer many advantages, including :
There are four main types of RRSP: individual, spousal, group and self-directed.
You can open and contribute to several RRSPs. For example, an individual RRSP plus a spousal RRSP. However, the amounts contributed to your RRSP accounts must not exceed your contribution room.
You can contribute to your RRSP no later than the first 60 days of the following year. For example, it’s too late to contribute to your RRSP for 2023; the deadline was February 29, 2024. However, if you haven’t yet contributed to your RRSP in 2024, it’s not too late. The RRSP contribution deadline for 2024 is March 1, 2025.
The maximum RRSP contribution is 18% of your previous year’s eligible earnings, up to the RRSP contribution limit set by the Canada Revenue Agency (CRA). To this number must be added your unused deductions from previous years. However, excess contributions (if any) and company pension plan contributions reduce your contribution room (due to the pension adjustment).
If you don’t contribute to your RRSP, or don’t contribute up to your contribution room, then your contribution room will be carried forward into the future. This is called “unused RRSP contribution room”. If you wish, you can use them in future years, for example, when your marginal tax rate is higher.
You can contribute more than your RRSP contribution room. However, this excess contribution (without penalty) is limited to $2,000. If you exceed this amount, you must pay a penalty of 1% per month on the excess amount until it is withdrawn from your RRSP.
You must transfer your RRSP to a Registered Retirement Income Fund (RRIF) no later than December 31 of the year in which you turn 71. Your funds will remain invested and tax-free, except for minimum withdrawals required by the government. Withdrawals from your RRIF will be taxed. If your spouse is under age 71, you can continue to contribute to his or her RRSP with a Spousal RRSP.
You can contribute to your spouse’s RRSP (married couple or common-law partner) up to your own RRSP contribution limit. The funds will belong to your spouse, but you will receive the tax deductions. It’s also a financial planning strategy, like income splitting in retirement.
The CRA sets limits on the amount you can contribute to your RRSP each year. This limit is called the “RRSP contribution limit“. As previously mentioned, you can contribute to your RRSP the lesser of your contribution room (18% of your previous year’s eligible earnings) and the RRSP contribution limit set by the CRA. For 2024, the limit is $31,560. This will rise to $32,490 in 2025.
Here are the RRSP contribution limits for the most recent years:
For example, if your qualifying income for 2023 was $180,000, then :
Thus, your RRSP contribution room for 2024 is $31,560, as 18% of your previous year’s income ($32,400) exceeds the RRSP contribution limit for 2024 ($31,560). However, unused contribution room from previous years and other factors may affect your RRSP deduction limit.
To find out how much RRSP contribution room you have, consult your most recent Notice of Assessment. Alternatively, you can check this information in “My Account for Individuals” on the Canada Revenue Agency (CRA) website.
In short, the RRSP is definitely a savings plan to consider in your financial planning for retirement. However, you need to be aware of your contribution room and the RRSP contribution limit set by the CRA to avoid paying unnecessary penalties.
You can open an RRSP by making an appointment with the financial advisor at your bank, credit union, insurance company or trust company. But you may decide to open an RRSP account with a robo-advisor, such as Wealthsimple Managed Investing. If you prefer to manage your own investments, you can open an RRSP account on an online brokerage platform, such as Wealthsimple Trade.
For 2024, the RRSP contribution limit set by CRA is $31,560.
You can contribute to your RRSP an amount equal to 18% of your eligible income for the previous year, up to the RRSP contribution limit set by the CRA ($31,560 for 2024).
You can contribute an excess amount (up to $2,000) to your RRSP without penalty. However, you will have to pay a penalty of 1% per month on the excess amount, if you exceed this amount.
Savings are here:
