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RRSPs are one of the best financial vehicles available to lower your yearly taxes and achieve significant, long-term savings goals. Every dollar you put in lowers your annual taxable income, which lowers the amount of annual taxes you’ll owe that year. At the same time, those RRSP dollars you contribute steadily gain interest year-over-year.
With tax season just around the corner, here’s a quick look at the key dates and deadlines that will help you keep more money in your pocket.
Just getting started with RRSPs? Check out our RRSP tips for beginners.
What is the RRSP deadline for 2024?
The last day to make RRSP contributions you can claim on your 2023 taxes is February 29, 2024.
Contributions made to your RRSP after this date cannot be claimed on your 2023 taxes and will instead be eligible for the 2024 tax year.
If you haven’t reached your RRSP contribution limit for the 2023 tax year (see the contribution limits section below) and you have some extra money, it might be a good idea to contribute some to your RRSP before March comes. This will help lower your 2023 tax bill.
What is the RRSP Contribution Limit for 2023?
Each year there’s a limit to how much money you can contribute to your RRSP. That limit changes from year to year and is also relative to your income.
For the 2023 tax year, the contribution limit is 18% of your pre-tax income, up to $30,780. The contribution limit for the 2022 tax year was $29,210.
Your limit will be reduced by any contributions you’ve made to a sponsored or company/employer pension plan. This amount will be indicated on the T4 tax slip you receive from your employer.
It’s also possible to contribute over your limit by up to $2000, though you won’t receive a tax deduction for the excess contribution. If you over-contribute above $2000 you’ll have to pay a tax of 1% per month on the excess, though there are exemptions and you can apply to have the penalties waived.
What happens if you miss the RRSP deadline?
If you miss the deadline or don’t reach your RRSP contribution limit for 2022, don’t sweat it. Unused portions of your contribution room roll forward indefinitely, year-over-year, increasing your RRSP deduction limit on your taxes.
For example, let’s say 2021 is the first year you’re eligible to deduct RRSP contributions on your taxes. Let’s also say your contribution limit that year was $10,000 (18% of your pre-tax income) but you didn’t contribute anything to an RRSP. In this case, all of your contribution room ($10,000) rolls forward to the 2024 tax year. In that case, you’ll be able to deduct $10,000 of RRSP contributions plus your 2024 RRSP contribution limit.
You can find your current unused RRSP contribution limit in several ways. The simplest way is to check your previous year’s Notice of Assessment. This is sent to you by the Canada Revenue Agency after you file your taxes each year. You can also call the CRA and at 1-800-267-6999.
Should you max out your RRSP?
If you have the ability to do so, maxing out your yearly RRSP contributions is one of the smarter things you can do with your money.
However, RRSP accounts typically “lock in” your funds for a set period of time, meaning you can’t easily withdraw them if you need to. You’ll also need to pay taxes on any RRSP amounts you withdraw. So you should only be maxing out your RRSP contributions if you feel comfortable setting that amount of money aside for the long-term.
However, if you have extra money and you’re deciding between putting it aside in a savings account, TFSA, or RRSP, it’s generally always wisest to max out your RRSPs first.
Is an RRSP loan a good idea?
If you want to max out your RRSP contribution limits but don’t have enough money to do it, you might want to consider an RRSP loan. It’s not the right option for every financial scenario but in some cases, it makes sense to borrow short-term in order to save long-term. This is particularly true if you have an average-to-high income, due to tax brackets.
In Canada, the higher your income the more taxes you pay. If you make below $49,020 your annual tax rate is 15%. If you make more than that, the dollars you earn above $49,020 are taxed higher and higher at different thresholds. Each of these thresholds is called a tax bracket.
For example, if you earn $60,000 per year your tax rate will be 15% on the first $49,020 and 20.5% on the remaining $10,980. If you contribute more than $10,980 to your RRSP, however, you’ll lower your taxable income enough so that your tax rate will stay at 15%. In other words, you won’t be paying tax on the $10,980.
In this scenario, an RRSP loan may make sense if you don’t have extra cash on hand to contribute. By taking out an RRSP loan for $10,980 (or more) and contributing it to your RRSP, you essentially lower your tax bracket. You’ll need to repay the loan in monthly installments but over time the money you save on your annual taxes, and the interest earned (tax-free) on your RRSP contributions, can make this a financially sound option.
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