2023 RRSP guide: RRSP deadlines, contribution limits, and more
It’s that time again when Canadians go out and buy RRSPs for the past year. Here’s a comprehensive resource to help you make good RRSP decisions this year.
Who is eligible to buy RRSPs?
Anyone who has earned income, has a social insurance number and has filed a tax return can contribute to an RRSP up until December 31 of the year they turn 71. After this age if you continue to have earned income, you can contribute to a Spousal RRSP up until December 31 of the year your spouse turns 71.
There’s lots of debate over whether your should buy Registered Retirement Savings Plans or not. Here’s my one formula approach to figuring out whether they make sense for you. The proper use of RRSPs: the one formula approach.
Maximum contribution limits
Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit (See chart) for the taxation year less
- Any company sponsored pension plan contributions (PA – pension adjustment)
|Tax Year||Income from||RRSP Maximum Limit|
- A Past Service Pension Adjustment (PSPA) arises in rare instances where a member of a pension plan has benefits for a post-1989 year of service upgraded retroactively.
- Pension Adjustment (PA) represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan.
For most people, earned income for RRSP purposes is the amount in box 14 of their T4 slips.
Earned income also includes self-employed net income, CPP/QPP disability payments and net rental income.
Income sources that do not qualify as earned income include investment income, pensions (including DPSP, RRIF, OAS, and CPP/QPP income), retiring allowances, death benefits, taxable capital gains and limited-partnership income.
Revenue Canada’s Form T1023 (Calculation of Earned Income) outlines all sources of earned income.
Obtaining your contribution limit
After processing your tax return, Revenue Canada sends a Notice of Assessment, which includes your next years’ contribution limit. This document also shows your unused contribution room.
Or you can call your local Tax Information Phone Systems (TIPS) number, which is found in the blue pages of your phone book under Tax Services. Be sure to have your SIN and previous tax return ready.
Related article: How much can I contribute to an RRSP?
You don’t necessarily need cash to make an RRSP contribution. You can contribute (in kind) a security you already own outside your RRSP.
The “in kind’ contribution is equal to the fair market value of the security when contributed. The security is deemed to have been disposed of at time of contribution. Be aware that this can have tax consequences.
Unused/carry forward contribution room
RRSP contribution room accumulated after 1990 can be carried forward to Subsequent years. If you are unable to maximize your RRSP contribution this year, you are allowed to make up the difference in later years.
The $2,000 lifetime over contribution allowance applies to those who have reached age 18 or older.
Your over contribution can be used as a deduction in future years. ($2,000 over contribution this year an be used as part of your deduction in the following year.
Any amount in excess of $2,000 will be charged a penalty of 1% per month.
Make monthly contributions
Contributing to RRSPs on a monthly basis not only makes saving for retirement easy, simple and automatic but you can also benefit from the power of Dollar Cost Averaging.
Related article: The Power of Dollar Cost Averaging
There are so many documented advantages of making regular contributions to the RRSP. Dollar cost averaging is one of the best ways to create a forced investment plan. From an investment perspective, dollar cost averaging can help you to buy more units when prices are low and less units when prices are high.
All or a portion of your RRSP contribution can be made to an RRSP in your spouses name. As the contributor, you get the deduction, but your spouse is the owner of the plan. This includes common-law spouse as defined by Revenue Canada
If you expect your spouse’s retirement income to be lower than yours, then a Spousal RRSP may be the best form of future income splitting. Remember the effective use of Spousal RRSPs requires planning ahead. Don’t wait until it is too late.
There can be tax implications when spousal funds are withdrawn.
More information: The proper use of Spousal RRSPs
RRSP deadline to receive a tax deduction
The deadline for a RRSP tax contribution is always 60 days after the end of the previous year to be eligible for a deduction for the 2022 tax year. This year the RRSP deadline is March 1, 2023. Consult with your financial institutions about how they are able to accommodate deadlines.
Contributions made in the first 60 days of the year can be applied against the previous taxation year or in any subsequent year.
If you are turning 71, this is the last year in which you may contribute to your RRSP. You must convert your RRSP by December 31 in the year you turn 71.
Know your marginal tax rate
One of the most important benefits of the RRSP is the tax deduction for the current tax year. While most people put money into the RRSP to save tax, many do not know how much tax they are saving. The easiest way to determine the benefit of your RRSP contribution is to know what your current marginal tax rate is when you combine the federal and provincial taxes.
Related article: Canadian Tax Brackets
Watch your tax bracket threshold
If you’re making a large RRSP catch-up contribution, consider only claiming enough of the resulting deduction to reduce your taxable income in the top tax bracket. You can carry forward the remaining deduction for greater tax savings in a future year against income that is taxed in the higher tax brackets.
For example, Jessica lives in BC and makes $68,000 per year and just inherited some money and wants to put some money away for her retirement. She has approximately $60,000 of unused RRSP contribution room and is wondering if she should contribute the entire $60,000 to use up the room.
If Jessica made the entire $60,000 contribution to the RRSP and deducted the entire amount on her tax return, she would get a tax refund of about $12,375.
Another option is to use half the deduction ($30,000) this year and save the other half ($30,000) for next year. She would get a refund of about $8000 in each year for a total tax savings of $16,000.
Related article: When should you use your RRSP deduction?
What is the Home Buyers’ Plan?
With the Home Buyers’ Plan (HBP), you can, take up to $25,000 out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. However, you do have to pay it back into your RRSP over the next 15 years.
Lifelong Learning Plan (LLP)
With the Lifelong Learning Plan (LLP), you can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your education. All you have to do is repay at least 10% per year for up to ten years.
Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid within 10 years.
Investment ideas for your RRSPs
Making good investment decisions is important to the long term growth of RRSPs. Here’s a few articles providing some investment ideas as well as some timeless investing tips for your RRSP:
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