Jonathan Mercier

By Jonathan Mercier

February 4, 2019

Money

7 things to know before contributing to an RRSP

Article revised on 2 December 2020

Planning on investing in a Registered Retirement Savings Plan (RRSP)? Starting to invest early as part of a sound financial plan for your retirement is a wise decision for your future! But do you know all there is to know about RRSPs? Here are a few basic details to know before you make your first contribution.

1. What’s an RRSP

The Registered Retirement Savings Plan is a long-term investment vehicle that’s generally used for retirement purposes. The RRSP acts somewhat like a bubble in which you can place various investments and keep them sheltered from taxes for a duration typically ending at retirement.

The amount you invest in an RRSP is reduced from your taxable income for the year, lowering the amount of taxes you would have to pay. As long as the funds remain in the RRSP, the investment amounts gained are also exempt from tax. It is when you withdraw money from your RRSP, typically at retirement, that this amount is added to your taxable income. We can therefore conclude that investing in an RRSP is a tax deferral strategy.

Even though they can be beneficial, RRSPS are not necessarily the ideal savings vehicle for everyone. Therefore, before you start investing in an RRSP, it’s best to consult a financial security advisor, who can analyze your situation and develop a savings strategy that is specifically designed to meet your needs.

2. Is there a minimum and maximum age for contributing to an RRSP?

There is no minimum RRSP contribution age. You can contribute to an RRSP the year after you file your fist eligible employment or business income tax returns. However, before age 18, your annual contribution cannot exceed $2,000.

The maximum RRSP contribution age is 71. More specifically, you can contribute to your RRSP until December 31 of the year you turn 71.

3. Until which date can I contribute to my RRSP so those amounts are deducted from my 2020 taxable income

For the 2020 tax year, you can include in your tax returns any new contribution made prior to March 1, 2021.

4. What’s the maximum I can contribute each year?

Your RRSP contribution limit, i.e. your maximum contribution amount for the current tax year is indicated on the notice of assessment you received following your last income tax filing. This amount factors in different elements.

  • You can contribute up to 18% of the previous year’s income without exceeding the current year’s maximum. For the 2020 tax year, this limit was set at $27,230.
  • Certain factors will increase this amount. For example, if you have unused contribution room from the previous years, it is added to the current year.
  • Conversely, other factors can reduce the contribution room. For instance, if you have exceeded the contribution room from the previous year or if you contributed to another pension plan. Your contribution room would then be reduced accordingly.
Why 18% of the income?
Because it represents the savings rate that would allow most people to use 70% of their employment income by retiring after 35 years of work.

5. What happens if I exceed my contribution limit?

If it is exceeded by $2,000 or less, this amount is simply deducted from the following year’s maximum contribution without penalty.

If it is exceeded by more than $2,000, you will have to pay a 1% tax per month on the excess amount for as long as that amount stays in your RRSP.

6. What happens if I don’t contribute the maximum amount?

Your unused contribution room is added to the following years’ maximum amount.

A tip to help you reach your RRSP contribution objectives without having to think about it: opt for preauthorized bank payments or better yet, payroll deductions!

7. Can I withdraw money from my RRSP before retirement, if necessary?

Yes. Even if an RRSP’s ultimate goal is to plan for retirement, you can withdraw from your plan if the type of investment you selected makes provisions for withdrawals.

You can, for example, take advantage of the Home Buyers’ Plan (HBP) to help with the purchase of a first home or the Lifelong Learning Plan (LLP) to finance your education. These plans allow you to make temporary, tax-free withdrawals from your RRSP.

However, if you do not withdraw from your RRSP in favour of one of these two plans, those sums become taxable and are added to your annual taxable income.

Feel free to contact a financial security advisor to help you build a solid savings and retirement strategy. Your financial security advisor is the person best suited to design a plan tailored to your specific needs, goals and values.

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