Making RRSP contributions
You must have “earned income” to contribute to an RRSP. To start building RRSP contribution room, you have to file an income tax return — even if you don’t owe any taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition. Your notice of assessment will tell you how much money you can put into your RRSPRRSP See Registered Retirement Savings Plan.+ read full definition each year.
Claiming your contributions
You can claim a tax deductionTax deduction A cost that you can deduct from your income when you file your taxes. This lowers the tax that you owe. For example, if you contribute $5,000 to your RRSP, you can deduct $5,000 from your income when you file your taxes.+ read full definition for the amount you contribute each year. Here’s how it works:
- You can claim up to certain limits each year.
- If you have a pension plan, your RRSP contribution will be reduced by an amount known as a pension adjustment or PA. Your PA is reported on your T4 slip each year.
- If you don’t contribute the full amount you are allowed in any 1 year, you can carry forward any unused contribution room.
- You don’t have to deduct amounts in the year you contributed them. For example, you can wait until you are in a higher tax bracket.
Learn more about contributing to an RRSP.
You have to file a tax return to earn RRSP contribution room. You don’t have to file a tax return to earn TFSATFSA See Tax-Free Savings Account.+ read full definition contribution roomContribution room The amount you can put into a savings plan like a Registered Retirement Savings Plan (RRSP). If you do not put the full amount into the plan each year, you will have extra, unused contribution room that you can use in later years. Example: Let’s say you can contribute $12,000 to your RRSP this year,…+ read full definition. Learn more about the differences between TFSAs and RRSPs.
Making TFSA contributions
Unlike an RRSP, you can’t deduct your contribution from the income you report on your tax return. Here’s how TFSA contributions work:
- You don’t have to have earned income to contribute to a TFSA.
- You don’t have to set up a TFSA or file a tax return to earn contribution room.
- You have to be 18 or older and have a valid Canadian Social Insurance Number.
- For 2020, the TFSA contribution limit is $6,000. Each year, the amount is indexed to inflation and rounded to the nearest $500.
- If you don’t contribute the full amount you are allowed in any one year, you can carry forward any unused contribution room, based on the contribution limits for each year.
Learn more about contributing to a TFSA.
2 key points
- You can deduct your RRSP contributions, up to certain limits, from your taxable income.
- You can’t deduct your TFSA contributions.