## RRSP deduction limit vs. contribution limit

Although these terms are often used interchangeably, it’s important to know the difference.

The deduction limit is the base amount you’re allowed to put into an RRSP and write off on your taxes each year. It’s a percentage of your income, up to a certain amount set by the CRA.

However, that’s usually not the maximum amount you can actually contribute. You see, anything you don’t put into an RRSP in one year rolls over to the next year, and the year after that.

That’s your contribution limit: the year’s deduction limit plus any unused contribution “room” carried over from previous years.

So unless you’ve been maxing out your RRSP contributions every year — most Canadians don’t — your deduction limit will be a lot less than your contribution limit.

## What is the RRSP deduction limit for 2020 and 2021?

In order to figure out how much you can contribute, the first thing you have to do is calculate your deduction limit. It’s 18% of your pre-tax income, up to a maximum amount defined by the CRA for that year.

The maximum deduction limit for the 2021 tax year is \$27,830. For 2020, it’s \$27,230.

As you can see, the number consistently increases year after year:

• 2019: \$26,500
• 2018: \$26,230
• 2017: \$26,010
• 2016: \$25,370

If 18% of your pre-tax income is higher than the CRA’s number for the year you’re filing for, the CRA’s number will be your deduction limit. Most people don’t earn well into the six figures, though, so they’ll be looking at 18% of their income.

Keep in mind, if you have multiple RRSPs — one for yourself and one for your spouse, for example — your deduction limit is how much you’re allowed to put into all of them combined.

## What is the RRSP contribution limit?

After calculating your deduction limit, you’ll need to look at your unused contribution room.

For easy math, let’s say you earned \$50,000 in pre-tax income during 2019 and didn’t have a pension. Your 18% deduction limit would be \$9,000. But if you only contributed \$6,000 to your RRSP that year, you’d have \$3,000 in unused contribution room left over.

That means if you earned \$50,000 in pre-tax income again in 2020, your contribution limit would be your 18% deduction limit (\$9,000), plus \$3,000 in unused contribution room from the previous tax year — \$12,000 in total.

If you haven’t maxed out your RRSP in a long time — or never contributed to one at all — your unused contribution room may go back quite a while. But the cutoff date for unused RRSP contribution room is 1990, so you can't take advantage of any unused room from before then.

Once you add your deduction limit and any unused contribution room from previous years, there's one more step. Subtract any contributions you made to a company-sponsored pension plan, like a Registered Pension Plan or Deferred Profit Sharing Plan.

Your pension contributions are reported in box 52 on your T4 as “pension adjustment” (PA), and you’ll need to report them on line 206 of your T1 General during tax-filing season. Good tax software can help you figure it all out.

## How to easily find your RRSP contribution limit

Figuring this out on your own can be a chore, especially if you’re going back more than a few years. Thankfully, there’s a simpler way.

The CRA tracks your contribution limit on your notice of assessment — that summary you receive each year after you file your tax return. Your limit is printed on your latest notice of assessment under the heading “Available Contribution Limit.”

It’s also easy to find your contribution limit online using the CRA website. Setting up an account only takes a few minutes if you have your social insurance number and an old tax return on hand.

Once you access your CRA account, you’ll be able to see your tax information from previous years, including older notices of assessment.

## How to report RRSP contributions

You can report your RRSP contributions on line 208 of your T1 General Income Tax Return. The financial institution that is managing the RRSP will provide you with a receipt.

Any contributions you make between March and December should be reported for that calendar year, but contributions made during January and February can be reported for the previous tax year or the current calendar year.

## Other ways to use your RRSP

While the main purpose of an RRSP is to build a nest egg for retirement, it can also come in handy earlier in life. Programs like the Home Buyer’s Plan and the Lifelong Learning Plan are great opportunities to take advantage of your RRSPs before you retire.

Under the Home Buyer’s Plan, you can take up to \$35,000 out of your RRSP and put it toward a down payment on your first home.

You won’t be taxed on the money you withdraw if you pay it back into your RRSP within 15 years.

Lifelong Learning Plan

The Lifelong Learning Plan allows you to use some of your RRSP savings to help pay for you or your spouse’s education — not your children’s.

You can take out up to \$10,000 a year, or \$20,000 in total, each time you participate in an education or training program.

You’ll need to start repaying the money into your RRSP either two years after your last eligible withdrawal or five years after your initial withdrawal, whichever comes first. The total amount you withdraw must be repaid within 10 years, or you’ll be taxed on the amount outstanding.

Pro tip, this option also requires a lot of paperwork.

## How to deal with RRSP over-contributions

If you accidentally go over your contribution limit for the year, don’t panic. The CRA allows you to contribute a maximum of \$2,000 past the yearly limit without penalty, though you don’t get a write-off on that amount.

However, excess contributions past \$2,000 will be subject to a 1% penalty per month. So don't do that.

You have a few options to correct the mistake:

• You can withdraw the over-contribution from your RRSP account and pay tax on the money you take out.

• You can complete a Schedule 7 form and carry a portion of your contribution forward, which will reduce your contribution limit for next year.

• If you’ve used your RRSP for the Home Buyer’s Plan or the Lifelong Learning Plan, you can complete a Schedule 7 form and designate your over-contribution as payment.

• You can write a letter to the CRA, saying it was an honest mistake and you want them to waive the penalty. You’ll also need to take steps to fix the over-contribution.

If you've got extra funds that will push you over the line, consider investing that money through an automated investment service, like Wealthsimple. It'll do all the work and automatically reshuffle your portfolio to help protect you from market turmoil.

## What is the age limit for contributing to an RRSP?

You are allowed to contribute to your RRSP until Dec. 31 of the year in which you turn 71.

With a spousal RRSP, you can continue making contributions until Dec. 31 of the year that your spouse turns 71.

At that time, you’ll need to either convert the RRSP into a Registered Retirement Income Fund (RRIF), buy an annuity or withdraw the full amount. If you take the third option, you’ll pay a hefty tax.

## Need to come up with funds for your RRSP?

Tax-advantaged accounts have numerous benefits and they perform best when you're able to max yearly contributions, or at least come close. So here are a few options for generating some extra income to put toward your retirement:

• Capitalize on doing the things you love. Monetize your secret talents and hobbies and set up your side hustle. You can create an account on an online marketplace for gig workers and advertise your skills for hire in your spare time.

• Grow your spare cash. Even if you’re new to the stock market, you can invest on autopilot with an app that does all the hard work for you by building you a portfolio and automatically rebalancing based on changes in the market.

• Review your insurance rates. You don’t need to stick to one rate for the rest of your life. Do some comparison shopping and find a better rate on your life insurance. Check whether you can save on mortgage protection as well.

• Find savings where you can. Take a good, hard look at your recurring bills. Get a library card and order books and movies to watch for free instead of paying for them and cancel any unused service subscriptions. You can also download a cashback rewards app to earn money as you shop for everyday items online and in-store.

### Shane Murphy

#### Reporter

Shane is a reporter for MoneyWise. He holds a bachelor’s degree in English Language & Literature from Western University and is a graduate of the Algonquin College Scriptwriting program.

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