Your Registered Retirement Savings Plan (RRSP) isn’t only an important retirement savings vehicle, but a powerful tax-saving tool.
Here’s what you need to know about the RRSP deduction limit so you can minimize taxes, maximize retirement savings, and stay in CRA’s good graces.
- 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 $30,780 for tax year 2023).
Is a 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 thing.
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 and not deduct it from your income tax return, these amounts can be different.
How does the RRSP deduction limit work?
Knowing your RRSP deduction limit helps you stay within your available contribution room. It can also help you maximize your tax refund, if you delay your RRSP deductions to a year when your total taxable income is higher.
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 $110,000, pushing him into a new tax bracket of 26%. Given this situation, Manal has two 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 in federal taxes.
- 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 $3,480 in federal taxes. Not counting any additional RRSP contributions he makes for next year!
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 18% = $32,400
- The RRSP contribution limit for 2023 = $30,780
Since your earned income last year exceeds the maximum RRSP contribution limit for 2023, your RRSP deduction limit would be $30,780.
It’s important to remember that there are other things that can affect your RRSP deduction limit, such as pension adjustments and unused contribution room from previous years.
What percentage of RRSP 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 you made in a given year don’t have to be claimed in the same year. Instead, these unused contributions can be carried forward to a future year.
What if I exceed my RRSP deduction limit?
You can’t contribute more than your allowable RRSP deduction limit in a year. If you do, your extra contributions, above $2,000, will get the attention of the CRA and 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.
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Frequently Asked Questions
There could be several reasons why your RRSP deduction limit is $0.
- No RRSP contributions made: If you don’t contribute to your RRSP during the year, you won’t have a deduction.
- No RRSP contribution room: If you use up all your RRSP contribution room, then there won’t be any RRSP deductions available.
- Other deductions or credits: If you claim other deductions or credits, such as pension income, union dues, or childcare expenses, your available RRSP deduction may be reduced.
- Employer pension plan contributions: If you have a pension plan through your employer, your contributions to that plan could reduce your available RRSP deduction.
To determine why your RRSP deduction is $0, you can review your tax return and consult with a tax expert.
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.
The RRSP contribution limit for 2023 is $30,780. That means while your individual RRSP deduction limit for the year is based on 18% of last year’s earned income, those who earned more than $162,278 can only contribute up to the maximum RRSP contribution limit for 2023.
The RRSP contribution limit increases to $32,4900 for the 2024 tax year.
You can find out your RRSP deduction limit by checking your Notice of Assessment from the Canada Revenue Agency or by logging into your MyCRA account.
