Do you dream of traveling the world when you retire? Maybe it’s really important for you to leave a legacy for your grandchildren. Putting away a little extra now can also help with day-to-day expenses during your golden years. 

Contributing to your Registered Retirement Savings Plans (RRSPs) can help you save for retirement, and reduce taxable income. You can also use your RRSP funds to buy your first home or pursue that post-secondary education you’ve been eyeing.

It’s never too late to take that step toward building a financially stable future for yourself by investing in your growth.

Key Takeaways
  1. Investing in RRSPs is an excellent way to plan for your retirement years.
  2. An RRSP is a retirement savings plan that is registered with CRA, and to which you or your spouse or common-law partner contribute.
  3. RRSPs can be self-directed plans or group plans.

What is an RRSP?

An RRSP is a retirement savings plan that’s registered with CRA, and to which you, your spouse or your common-law partner can contribute. While RRSPs can be self-directed plans or group plans, investing in RRSPs is an excellent way to plan for your retirement years.

Who doesn’t want to have a comfortable lifestyle once they’ve left the workforce?

RRSPs also offer an immediate benefit when it comes to your tax return

  • The amounts contributed to your RRSP reduces your net income.
  • The money you contribute to the RRSP and the investment in the plan are sheltered from taxes until you start withdrawing the money.

This is why an RRSP is considered one of the most powerful tools to save taxes.

RRSP contribution room / deduction limit

First, let’s understand the difference between the contribution room / deduction limit and the deducted contributions.

  • Contribution room is how much you are allowed to contribute into any RRSP plan (personal or spousal).
  • Deducted contributions are how much of your contributions you wish to deduct in your Income Tax and Benefits return.

Each Canadian taxpayer has an annual RRSP Contribution Room based on their income so it has a maximum ceiling. The contribution room increases every year by earning new income. However, it decreases when you contribute to your RRSP.

To keep track of your RRSP deduction/contribution room, you can contact CRA or access the information in your My Account services. If you are not registered in My Account, you will find this information in your NOA (Notice of Assessment).

Carrying forward unused contribution room and undeducted contributions

Any unused contribution room will be carried forward to the next years. Similarly, any undeducted contributions will be carried forward too. This allows you to deduct from your contributions what you need to reduce your tax liability or get the maximum refund. The rest of the contributions which have no effect on your taxes can be carried forward. Also, if you suspect that you will be making more income in the next year, you can save some of your contributions and deduct them later.

Regardless of why you choose to save some of the contributions to future tax years, you have to claim the actual contribution on the tax year it was made. CRA will keep track of the undeducted portion and note it on your NOA.

Contributing to a spousal RRSP

  • Does your partner work?
  • Does she/he need help saving for retirement?
  • Have they maximized their contribution room but you still have more room?

As explained earlier, you can contribute to a personal RRSP or a spousal/common-law partner RRSP. The amount you can contribute to her/his plans depends on your own contribution room, not your spousal’s. In other words, it doesn’t matter if your spouse has a higher or lower contribution room, it will not be affected if the contribution came from you.

Spousal RRSP contribution rules

  • The maximum age limit up to when you can contribute to your personal RRSP is 71.
  • However, you can contribute to a spousal/common-law partner RRSP until your partner turns 71 as long as you have enough contributions room.

For example: If your contributions room is $10,000 and your spouse’s contributions room is $20,000, you will be able to contribute a maximum of $10,000 to either your plan, your spousal’s plan, or combined.

Early withdrawal from a spousal RRSP

  • If any of the contributions made to a spousal plan is withdrawn before 3 years, the fund will be attributed back to you and it will be considered your income, not your spouse’s income. This rule applies even if you have multiple spousal plans.

For example:

In 2020 you started contributing $1,000 per year to your spouse’s RRSPs. In 2022, the balance was $3,000 and your spouse withdrew $2,000, leaving $1,000. Before 2022, they had not withdrawn any amounts.

You have to include $2,000 as income which is the lesser of amounts you contributed to the spousal RRSPs in 2020, 2021, and 2022 ($3,000) and the amount your spouse withdrew from the spousal RRSPs in 2022 ($2,000).

Your spouse does not include any amount in their income for this withdrawal. If they had waited until 2023 to use the funds, it would be included in their income instead.

Over contributions

Since the deduction limit is a confusing subject to some taxpayers, sometimes people go over their allowed limit. Your excess contribution will be subject to a 1% penalty monthly in excess of $2000 until you withdraw the excess. This $2000 cushion is available only for taxpayers 19 years of age or older. You can file a T3012A form to withdraw the amount of excess contribution to waive the penalty. This excess amount will be added to your income.

RRSP deductions

In essence, the amount of money you invest into your future by using RRSPs offers an immediate tax break. This is because RRSP contributions are entered on line 20800 of your return – the section of the return used for applying deductions to determine your net income. The lower your net income, the less income tax you have to pay. Your plan provider will send you RRSP invoices that summarize the total contribution made in the tax year.

Contributions deadline

You are allowed to deduct 12 months’ worth of contributions. CRA has divided the contribution periods into two:

  • Contributions made from March 2nd to Dec 31st of the tax year.
  • Contributions made from Jan 1st to March 1st of the following year which is the first 60 days after the taxation year.
  • Any contributions made after the next 60 days will be considered the following taxation year’s contributions.

You can contribute periodically or a lump-sum amount. Since you are allowed to claim contributions made in the first 60 days of the following tax year, before the end of February you can estimate your tax liability; if you will have an amount due, you still can contribute to your RRSP and claim the contribution to reducing your taxes.

For example:

  • Jeff earned $65,000 last year. His payroll department did a good job and deducted the proper amount of income tax, Canada Pension Plan premiums, and Employment Insurance premiums. At this point, Jeff is in a break-even situation income tax-wise. He neither owes nor is getting a refund.
  • If Jeff contributes $3000 to RRSPs in April and $2000 in January of the next year, he is not only beginning his retirement nest egg but he will also now receive a tax refund. This is because his net income for tax purposes has been reduced by that $5000. The bottom line varies by where Jeff lives, as each province has its own tax rate. If he lives in Ontario for example, his tax refund would be approximately $1500.

There’s more good news for Jeff. The gains on his RRSP contributions are tax-deferred. This means that his contributions can grow within the RRSP account and he won’t have to pay any tax on them until he draws them out. If Jeff decides to put his $5000 into a regular interest bond, for example, he will declare all of his gains yearly on his tax return and those gains would be subject to income tax. By using RRSPs, Jeff won’t pay any tax on his contributions or gains until he withdraws them. Additionally, there’s a good chance that Jeff will be earning less in his golden years. If that’s the case, he will fall into a lower tax bracket and be subject to even less tax.

Using the RRSPs to pay for a new home – the Home Buyer’s Plan (HBP)

RRSPs also offer options before retirement.

  • If you want to purchase your first home, you can withdraw up to $35,000 (raised from $25,000 with 2019 Budget) using the Home Buyer’s Plan as borrowed money.
  • You have 2 years to start paying it back to your RRSP and 15 years to pay it off.
  • You will have to make yearly contributions to your RRSP then allocate payments to HBP. Otherwise, it will be added on your income and you will be charged taxes on this amount.
  • You can contribute more money into your HBP payments to finish it off sooner.
    • Since the amount due is distributed equally on 15 equal payments, the more you contribute the lesser the amount of the payment will be.

You are considered a first-time home buyer if, in the four-year period, you did not occupy a home that you owned or one that your current spouse or common-law partner owned. You and your spouse can withdraw the maximum allowed amount in as long as the fund has matured in the plan for no less than 89 days.

Here’s an example:

Nancy withdrew $30,000 from her RRSP under the HBP. In two years she will have to start paying back 15 equal payments of $2000 each year to cover the amount. She will have to make an RRSP contribution first then the money will be taken from this contribution and allocated to the HBP. So let’s look into these different scenarios:

  • If Nancy contributed $2000 to her RRSP à the full amount will be allocated to her HBP – none should be allocated as RRSP deductions.
  • If Nancy contributed $1000 to her RRSP à $1000 will be allocated to her HBP and the missing $1000 will be added to her income on Line 12900 and taxes will be applied to this amount.
  • If Nancy contributed $3000 to her RRSP during the first year:
    • She can either allocate $2000 to the HBP and $1000 as regular RRSP deductions on Line 20800.
    • Or she can allocate the whole amount of $3000 to her HBP. In this case, her next 14 payments will change from $2000 to $1928.57.

Using the RRSPs to pay for education – LLP

If you want to further your or your partner’s education, the Lifelong Learning Plan can help. LLP works similarly to the HBP regarding withdrawals and payments except for:

  • You have 5 years to start paying the plan – 4 years of education and 1 year for finding a job.
  • You will have to pay it back in 10 years.
  • The maximum amount you can withdraw is $20,000 – $10,000 maximum annually.

For the HBP and the LLP withdrawals, you will receive a T4RSP slip with the amount stated on Box 25 for LLP and Box 27 for HBP. These amounts will not be reported as income, otherwise, you can report the withdrawals on your schedule 7.

You cannot pay someone’s else LLP or HBP from your own personal or spousal contributions. If you have a spousal RRSP for your wife and she has her own HBP, you cannot allocate payments for her HBP from your contributions to the spousal plan.

Turning 71

The last day you can contribute is Dec 31st of the year you turn 71. Then you have to stop contributing to any personal RRSP plans. You will then have to decide what to do with your RRSP plan. You can either convert it to annuity payments (periodic payments) or you can transfer it to an RRIF plan which is also a CRA registered plan that pays annuity payments. If you don’t transfer your RRSP plan to an annuity plan, the total matured fund will be paid to you in lump-sum and you will be taxed on the full amount the year you receive it. The periodic payments will be reported in Box 16 of your T4RSP slip. All tax deducted will be reported in Box 30.

If your spouse has not turned 71 yet, you can choose to contribute to a spousal plan until she /he turns 71. This way you can still reduce your taxes while using up the remainder of your contribution room.

If you still owe a balance to your HBP or LLP after you turn 71, you either have to pay the full remaining balance as a lump sum or partial payments until you turn 72, or report the balance as income on your tax return.

RRSP payments and Other withdrawals

Your personal RRSP plans will start paying retirement annuity payments after you turn 71. At this time, you will be paying taxes on this income based on your current tax bracket.

If prior to maturity (before age of 71) you need to withdraw funds from your RRSP to cover current living expenses, you will receive this info in Box 22 of your T4RSP slip. This amount will be taxed based on your current tax bracket. So, if you are earning income from other sources, withdrawing from your RRSP will increase your income, hence increasing your tax bracket. You also will be paying a penalty tax on the early withdrawals reported on Box 28 as follows:

  • 10% of the first $5,000
  • 20% for amounts over $5,000 to $15,000
  • 30% for amounts over $15,000

These taxes are deducted as a credit when you file your tax return.

TurboTax offers a terrific tool for estimating how much of a difference your RRSP contribution will make to your tax return. By simply entering your province of residence, income, and tax deducted and then choosing an RRSP contribution amount, you can see the impact on your bottom line tax numbers.

And it’s not too late. Canada Revenue Agency allows taxpayers to use RRSP contributions made within the first 60 days of the current year on their previous year’s return. This means that once you have determined the right amount to purchase, you still have until the end of February to make your contribution and have it factored into your tax return.

As such TurboTax software will allow you to auto-fill your tax return directly from your “CRA My Account“, it also has an RRSP optimizer to enable you to utilize your deduction amounts and provide you with a minimum amount due while maximizing your refund and help you determine how much you should carry forward.