Registered Retirement Savings Plans (RRSPs) are savings plans designed to help Canadians save for retirement. Your RRSP contributions can be put into investments or savings deposits while in the plan. Your contributions are tax deductible. That means you can claim them as a tax deduction when you file your income tax return — and lower the tax you pay.
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How much can you contribute to an RRSP?
The amount you can contribute each year depends on your income. If you file an income tax return and earn income, you build contribution room for your RRSP each year. This contribution can be done monthly, yearly or in lump sums.
You can check your RRSP contribution room in your CRA MyAccount, along with information about your TFSA contribution room and Notice of Assessment. You receive this Notice of Assessment after you file your tax return.
If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
You have 60 days after the end of the year (usually until March 1, or February 29 in a leap year) to make your RRSP contribution for the previous year. Build your savings faster by making your contributions early in the year.
If you contribute more than your annual RRSP limit
If your contributions for the year exceeds the deduction limit shown on your latest Notice of Assessment by more than $2,000, you’ll be charged a 1% tax per month on the excess amount. Learn more about excess RRSP contributions.
If you contribute less than your annual RRSP limit
If you don’t have money to contribute to your RRSP this year, you can carry forward your contribution room indefinitely to future years.
If you have unused RRSP contributions
You don’t have to deduct an RRSP contribution on your tax return in the same year you make the contribution. You can wait and deduct it in a future year. You may choose to do this if you think your income will be higher in the future, moving you up to a higher tax bracket. This is called having unused RRSP contributions. Learn more about how it works.
Should you make an RRSP contribution or pay down debt?
If you contribute to your RRSP, you’ll pay less tax. But if you pay down debt, you’ll pay less interest. Which is better? There are many factors to consider, and it all depends on your personal and financial situation. Use this calculator to help you compare the rate of return you’re getting from your RRSP investments against the interest rate you’re paying on your debt to help you make a decision.
Should you borrow money to contribute to an RRSP?
One of the advantages of an RRSP is being able to claim your contributions as a tax deduction. This reduces your taxable income. As a result, this can lower how much tax you owe and even contribute to a tax refund.
If you don’t have enough money to make an RRSP contribution but still want to benefit from the tax deductions, you could borrow money to contribute. However, you’ll need to be sure you can afford to re-pay the loan.
Consider these questions before borrowing to invest in an RRSP:
1. What is the interest rate on the loan?
Borrowing money when interest rates are high can be costly. Interest can add up and reduce the benefit of making the RRSP contribution. Also, interest on money borrowed to contribute to an RRSP is not tax-deductible.
2. Can you afford to repay the loan back within the next year?
If you can’t afford to pay the loan back quickly, it probably doesn’t make sense to add more to your debt load. Interest charges can add up and override the initial benefit of making the RRSP contribution. You can use your tax refund to repay all or part of the loan. But this would mean you are not using your refund for other savings or expenses.
3. What other debts do you owe?
Do you have other high-interest debt? If you’re already paying high interest on credit card debts, your priority will likely be on paying down that debt quickly — and not taking on more debt.
4. What is your taxable income?
Tax deductions can be more valuable for people at moderate to higher income levels. That’s because their tax rates will be higher. If you’re in a lower tax bracket, there may be no tax advantage to making an RRSP contribution, even if you have the contribution room. Learn more about tax rates.
Instead of borrowing a large amount for an RRSP contribution, you could contribute what you would have paid to service the loan. Estimate what your monthly repayments would cost and make that your monthly contribution. You’ll pay no interest, and you won’t be affected if interest rates rise. To help you with your decision, you may want to talk to a financial advisor.
How does your pension plan affect your RRSP contribution room?
Your RRSP contribution room is reduced if you participate in a pension plan or deferred profit-sharing plan. The government wants to provide everyone with an equal opportunity for tax-sheltered retirement savings. If you are in a defined benefit plan, a defined contribution plan or a deferred profit-sharing plan, you won’t be able to contribute as much to your RRSP.
What is a pension adjustment?
The reduction in your RRSP contribution room is known as a pension adjustment.
- Under a defined benefit plan – your pension adjustment is an amount that approximates the value of the pension benefit you earned in the previous year.
- Under a defined contribution or deferred profit-sharing plan – your pension adjustment is the amount that you and your employer contributed to your plan account in the previous year.
How to transfer money between RRSP accounts and more
If you hold more than one RRSP, you can transfer money between your RRSPs at the same or different financial institutions, without triggering tax consequences. In certain situations, you can make other transfers to your RRSP, and between your RRSP and other registered plans.
- Tax will not be withheld if the transfer is made directly by the financial institution. One or both of the financial institutions involved may charge you a transfer fee.
- Amounts you transfer directly to your RRSP do not affect your RRSP deduction limit.
- You can’t transfer money from your RRSP to the RRSP of someone else. This applies to any spousal RRSPs that you may be contributing to.
How to transfer money into an RRSP from a non-registered account
You can transfer investments, such as stocks or bonds, from a non-registered account to your RRSP. This is called a transfer “in kind”. You might do this if you don’t have the cash to make your contribution, but you have investments that you want to use instead. However, this does have tax consequences.
You are considered to have sold your investments at their fair market value and will have to report any resulting gain on your tax return. You can claim an RRSP deduction equal to the fair market value of the investments transferred to your RRSP. If the fair market value results in a loss, in order to claim the loss on your tax return, you must first sell the investments and then contribute the cash proceeds to your RRSP.
How to transfer money between RRSPs and other registered plans
In certain situations, you can transfer funds from one registered plan to another without triggering tax consequences. For example:
- From an RESP to an RRSP – If your child has an RESP and doesn’t continue with their post-secondary education, you can get your contributions back. You may be able to transfer up to $50,000 of the earnings on your contributions tax-free to your RRSP or your spouse’s. You must have unused RRSP contribution room to do so. Learn more about these transfers.
- From an RRSP to an RDSP – If you are the parent or grandparent of a financially dependent child or grandchild with an RDSP, you can arrange to have your RRSP transferred tax-free to their RDSP when you die. Learn more about this type of transfer.
You can contribute to an RRSP monthly or annually. RRSP contributions help you save for retirement. And they offer tax advantages during your working years. These advantages will be more useful for Canadians on moderate to higher incomes, who expect to have lower incomes during their retirement than they did while working. Remember:
- Your RRSP contributions can be held as investments or savings deposits
- There are tax advantages to contributing to an RRSP. You can claim them as deductions when you file your income tax return, which can lead to paying less tax or receiving a refund.
- Borrowing to invest in an RRSP can help you build your savings. However, you should ensure you have a plan to repay the loan within a year, including the interest.
- You can transfer money between RRSPs or between non-registered accounts and RRSP. There may be tax consequences depending on the transfer.
- Work with a financial advisor if you need support to manage your RRSP.