With tax season upon us, you want to ensure you don’t miss out on contributing to your Registered Retirement Savings Plan (RRSP) by the contribution deadline. Not only can it help maximize your tax savings, it also allows you to save for your retirement, purchase your first home, or pay for your education.
With all these amazing benefits, we’re here to give you the lowdown on the RRSP contribution deadlines, contribution limits, and whether you should contribute to your spouse’s RRSP.
What is the deadline for RRSP contributions?
The deadline for contributing to your or your spouse’s RRSP is 60 days after December 31 . In other words, the last day to make an RRSP contribution to deduct on your 2023 return is February 29, 2024. Whereas the deadline for the 2022 tax year was March 1st, 2023. Simply put, any contributions made up to 60 days after December 31, 2023, will be included in the 2023 tax return.
Don’t worry if you miss the deadline. You can make contributions throughout the year—it just means that they will be included in the following year’s tax return instead.
Why does the RRSP contribution deadline matter?
The contribution period for the 2023 tax year is March 1 to December 31, 2023, plus the first 60 days of 2024. The ‘deadline’ matters because you’re required to report your RRSP contributions based on the contribution period—not the calendar year. This is a difficult concept for people to grasp and is why the first 60 days’ RRSP contribution receipts are often missed.
The best part is that the money you contribute to your RRSP is considered a tax “deduction,” meaning it reduces your taxable income. As such, the amount you contribute will lower the amount of income you’re taxed on—which may result in lowering the amount of taxes you owe or even getting a refund. (Don’t you just love the feeling of putting money back into your pocket?)
How do I determine whether I should contribute to my RRSP?
To determine whether you should contribute, consider what tax rate you would pay on the money if you claimed it now versus the rate you anticipate paying when you ultimately do withdraw the money.
Keep in mind when retirement rolls around, RRSP withdrawals will count as income, and you have to pay income tax on them as you would now. The only difference is that you would typically have a reduced income in retirement—because you’re most likely enjoying your days golfing or spending time with your grandkids—which means you may end up paying less income tax.
On the other hand, contributing to your RRSP may not be in your best interest if you end up paying more tax on it when you withdraw it at retirement than you would if you simply claimed the income now.
Generally speaking, those earning lower income in their working years who don’t need the tax deduction may be better off investing in a tax-free savings account than an RRSP at first. However, you should look carefully into your own finances to determine which is best suited for your situation.
What is the RRSP contribution limit?
Your RRSP contribution limit is either 18% of your earned income for the tax year or the annual RRSP limit for the tax year, as published by the CRA published by the CRA (which is $30,780 for 2023)—whichever is lower. You can deduct up to your RRSP contribution limit to calculate your taxable income. You can find this information in your CRA My Account or the Notice of Assessment (NOA).
Let’s say you have $15,000 in contribution room for the 2023 tax year. If you contribute $12,000, the remaining $3,000 will be carried forward to your annual contribution limit for the following year. This enables individuals who may have experienced challenging times to catch up to their investment goals in later years.
What happens if I over-contribute to my RRSP?
Here’s where you’ll want to be mindful of your contribution room: If you accidentally over-contribute to your RRSP, it can add up quickly. The CRA does offer some grace, in that if you over-contribute up to $2,000 they won’t penalize you. However, if you contribute more than $2,000, there is a 1% penalty per month that begins in the month in which you over-contributed.
What about contributing to a spouse’s or common-law partner’s RRSP?
Another way to make RRSPs work better for you is to contribute to your spouse’s RRSP. How does this work, exactly? If your spouse currently earns or is likely to earn less than you after retirement, a spousal RRSP contribution may work better for you.
For example, let’s say your 2023 RRSP deduction limit is $10,000. If you contributed $4,000 to your spouse’s RRSP, that means you can contribute $6,000 to your own RRSP ($10,000-$4,000=$6,000). The amount that you deduct for total contributions to your own RRSP and your spouse’s RRSP cannot exceed your RRSP deduction limit.
Your spouse’s or common-law partner’s RRSP can also help you get around age restrictions. For instance, when you turn 71, you’re no longer allowed to make contributions to your RRSP, as you’re required to convert it to a registered retirement income fund (RRIF). However, as long as your spouse is younger than 71, and you have contribution room, you can deduct contributions made to a spousal RRSP. Doing so helps you lower the overall tax you’ll pay. A bonus: This can be a big benefit, as lower-earning spouses will typically pay less tax on the money when they withdraw it after retirement.
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