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RRSP Contribution Limits in Canada

If you’re Canadian, you should consider opening a Registered Retirement Savings Plan (RRSP), as they’re tax-advantaged accounts. But they do come with contribution limits, so be sure to know what they are to avoid any penalties from exceeding that amount.

What is an RRSP?

An RRSP lets you save for retirement with tax-free growth. Because of their tax advantages, they become an essential part of retirement planning.

What is an RRSP Contribution Limit?

The Canada Revenue Agency (CRA) sets limits to how much you can contribute towards an RRSP every year. In 2021, you can contribute to a maximum of 18% of your gross monthly income or $27,830, whichever is the lowest. You won’t get penalized if you exceed the contribution limit by $2,000 or less, but no tax can get deducted on the excess amount. If you contribute over $2,000, you will get subject to a penalty tax of 1% of the exceeded amount for every month it’s invested in your RRSP.

Your RRSP Contribution Limit

Your total RRSP contribution amount is each year made up of your current year’s contribution limit, as well as any contribution rooms carried forward from previous years. CRA will allow you to carry forward unused contribution rooms indefinitely if you don’t make the maximum RRSP contribution allowed. These can get added to any future contributions in the coming years. Your contribution room doesn’t get affected by certain transactions, such as:

  • Transfers from another RRSP
  • Retiring allowances
  • A transfer due to the death of a spouse or the breakdown of a relationship
  • Transfers of property

To find your contribution limit and carry forward contribution room, you can look at your notice of assessment. The CRA will keep a record of your contribution room for you. This, along with contribution deadlines for your RRSP contributions, can get found on the CRA website. If you have a pension plan sponsored by your employer, your RRSP contribution will get reduced by the pension adjustment. Your employer will calculate the pension adjustment and report it to the CRA on your T4 every year.

RRSP Age Limit

You will stop contributing towards your RRSP on December 31 of the year you turn 71 years old. You will then have to convert your RRSP into a Registered Retirement Income Fund (RRIF) or purchase an annuity. If your spouse is still under the age of 71, you can continue contributing towards their RRSP up until December 31 of the year they turn 71 years old.

Conclusion

While you plan for retirement, contributing to an RRSP is a great way to reduce your annual taxable income. Avoid penalties by only contributing the contribution limit as set by the Canadian government. Don’t leave retirement savings for later in life. The sooner you start, the sooner you can take advantage of all the benefits of an RRSP, and the better off you will be once you retire.

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