Your Registered Retirement Savings Plan (RRSP) isn’t only an important retirement savings vehicle, it’s also a powerful tax saving tool.
Here’s what you need to know about the RRSP deduction limit to minimize taxes, maximize retirement savings, and stay in the Canada Revenue Agency (CRA)’s good graces.
Key Takeaways
- An RRSP deduction limit is the maximum amount of money you can contribute to your RRSP and claim as a tax deduction when completing your income tax return.
- You can find your RRSP deduction limit on your Notice of Assessment or in your My CRA Account online.
- RRSP contributions don’t need to be claimed in the year of the contribution. Some or all of the contributions can be carried forward to a future year, ideally when your taxable income is higher.
What is an RRSP deduction limit?
An RRSP deduction limit is the maximum amount of money you can contribute to your RRSP and claim as a tax deduction on your income tax return.
More specifically, it’s the lesser of 18% of your income from the previous year or the annual limit set by the CRA (up to a maximum of $31,560 for tax year 2024).
Is an RRSP deduction limit the same as a contribution limit?
Even though your RRSP deduction limit and contribution limit are related, they aren’t the same.
An RRSP contribution limit sets a cap on the amount of money you can contribute to your RRSP in a given year. Your RRSP deduction limit determines the maximum amount of money you’re allowed to claim as a tax deduction on your income tax return for contributions made to your RRSP.
You can have the same deduction limit and contribution limit, but if you make a contribution in a prior year that you did not deduct on your income tax return, these amounts can be different.
How does the RRSP deduction limit work?
Your deduction limit is the maximum you can deduct from your total income for the year. If no RRSP deduction is claimed, whether an RRSP contribution is made or not, the deduction limit available is carried forward and added to the additional deduction limit calculated on your current year’s earned income. You can choose to delay your RRSP deductions to a year when your taxable income is higher to help maximize the tax savings.
Let’s look at an example with Manal’s situation:
Manal has an RRSP deduction limit of $14,400 and earns $80,000 per year, which puts him in the federal tax bracket of 20.5%.
Next year, Manal’s salary is expected to increase to $115,000, pushing him into a new tax bracket of 26%. Given this situation, Manal has 2 options:
- He can contribute $14,400 to his RRSP and fully deduct the contributions when he files his taxes this year, saving him $2,952. See the math here:
$80,000 – $14,400 = $65,600
He’ll pay 15% taxes on the portion of taxable income that is $55,867 or less plus 20.5% on the portion of taxable income over $55,867 up to $111,733.
$55,867 – the basic personal amount of $15,705 = $40,162
$40,162 x 0.15 = $6,024.30
$65,600 – $55,867 = $9733
$9733 x 0.205 = $1995.27
$6,024.30 + $1995.27 = $8,019.57
His taxes due if he had not contributed $14,400 to his RRSP would be $10,971.57
$55,867 – the basic personal amount of $15,705 = $40,162
$40,162 x 0.15 = $6,024.30
$80,000 – $55,867 = $24,133
$24,133 x 0.205 = $4,947.27
$6,024.30 + $4,947.27 = $10,971.57
$10,971.57 – $8,019.57 = $2,952
2. Manal can save even more in taxes by deducting the $14,400 next year when he’ll be in the next tax bracket of 26%, saving him at least $3,131.68 in federal taxes. Not counting any additional RRSP contributions, he makes for next year!
He’ll pay 15% taxes on the portion of taxable income that is $55,867 or less plus 20.5% on the portion of taxable income over $55,867 up to $111,733 then 26% on the amount over $111,733 up to his total income of $115,000.
$55,867 – the basic personal amount of $15,705 = $40,162
$40,162 x 0.15 = $6,024.30
$111,733 – $55,867 = $55,866
$55,866 x 0.205 = $11,452.53
$115,000 – $111,733 = $3,267
$3,267 x 0.26 = $849.42
$6,024.30 + $11,452.53 + $849.42 = $18,326.25
But when his $14,400 of RRSP contributions are taken into account, the amounts due change to:
$115,000 – $14,400 = $100,600
$55,867 – the basic personal amount of $15,705 = $40,162
$40,162 x 0.15 = $6,024.30
$100,600 – $55,867 = $44,733
$44,733 x 0.205 = $9,170.27
$6,024.30 + $9,170.27 = $15,194.57
$18,326.25 – $15,194.57 = $3,131.68
In our example, Manal’s $14,400 RRSP contribution has the power to bring him into a lower tax bracket, from 26% to 20.5%, and save more taxes overall by saving his RRSP deduction for next year when his income will be higher.
How is my RRSP deduction limit calculated?
To calculate your RRSP deduction limit, take the lesser of 18% of your previous year’s earned income or the maximum limit set by the CRA.
For example, if you made $180,000 in earned income last year.
- Last year’s earned income of $180,000 x 0.18 = $32,400
- The RRSP contribution limit for 2024 = $31,560
Since your earned income last year exceeds the maximum RRSP contribution limit for 2024, your RRSP deduction limit would be $31,560.
It’s important to remember that other things can affect your RRSP deduction limit, such as pension adjustments and unused contribution room from previous years.
What percentage of my RRSP contribution is tax deductible?
100% of your RRSP is tax deductible. Contributions made to your RRSP reduce your taxable income dollar for dollar.
That means if you contribute $1,000 to your RRSP and claim the tax deduction for that contribution, your taxable income will be reduced by $1,000.
How do RRSP contributions affect my deduction limit?
RRSP contributions deducted from your income will reduce your deduction limit. RRSP contributions you make in a given contribution period, which is from March 1 to December 31 of the tax year you are filing, plus the first 60 days of the following calendar year, don’t have to be deducted from that year’s income, but they do have to be reported. If they are not deducted in the year the contributions are made, the amount carries forward as an “unused RRSP contribution”, and has no effect on your deduction limit until it is deducted from your income.
What if I exceed my RRSP deduction limit?
You can’t deduct more than your RRSP deduction limit in a year. If you contribute more than your contribution limit you may face penalties of 1% per month.
Here’s the good news. Canadians who are 19 years and older can have $2,000 extra in their RRSP if they accidentally contribute more than the allowable amount. So, if you accidentally over-contributed a few hundred bucks, it’s not going to cost you anything.
Just know that you won’t receive a tax deduction for the excess contribution.
Frequently asked questions
1. Why is my RRSP deduction $0?
There could be several reasons why your RRSP deduction is $0.
- No RRSP contributions made: If you don’t contribute to your RRSP during the year, you won’t have a deduction.
- The deduction limit is zero: If you maximized your RRSP deductions in previous years and did not earn income to open more, then you cannot make an RRSP deduction.
- Employer pension plan contributions: If you have a pension plan through your employer, contributions to that plan may reduce your RRSP deduction.
To determine why your RRSP deduction is $0, you can review your tax return and consult with a tax expert.
2. Can the CRA waive the tax on my RRSP over contributions?
If you mistakenly over contribute to your RRSP 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. Read more on RRSP over contributions here.
3. What is the 2024 RRSP contribution limit?
The maximum RRSP contribution for 2024 is $31,560, with your own contribution limit determined by prior year activities.
Your RRSP deduction limit for the year is limited to any unused RRSP contribution room, plus the lesser of 18% of earned income or the maximum annual limit, minus pension adjustments, and possibly affected by other pension-related activity. Those who earned more than $175,333 can only contribute up to the maximum RRSP contribution limit for 2024.
4. Where do I find my RRSP deduction limit?
You can find your RRSP deduction limit by checking your notice of assessment from the Canada Revenue Agency or by logging into your CRA My Account.
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