Who can contribute to an RRSP?
- If you have earned income, you can contribute to an RRSP up until the year you turn 71.
- Contributions made in the first 60 days of 2024 can be applied against either your 2023 or your 2024 contribution.
How much can you contribute?
Take the lesser of | (-) Minus | (+) Plus | |
---|---|---|---|
Tax year 2023 | 18% earned income from 2022 or the maximum of $30,780 |
PA* from 2022 PSPA* from 2023 If a member of a pension plan |
Unused contribution room accumulated after 1990 PAR* from 2022 |
*Pension Adjustment, Past Service Pension Adjustment, Pension Adjustment Reversal
You can also check your limit on the Notice of Assessment that the Canada Revenue Agency sent you after processing your tax return. Your RRSP contribution limit is noted there, including any unused room. The Tax Information Phone Systems (TIPS) will also give your current contribution limit — Toll-Free Number 1.800.267.6999. You must have your SIN and your previous year’s tax return handy.
Contributing in-kind
- If you don’t have the cash available to make your contribution, you can contribute securities you hold outside your RRSP.
- Your “in-kind” contribution will be equal to the security’s fair market value when it is contributed.
- Contributions of securities are considered deemed dispositions; therefore, any capital gains must be reported.
- Losses cannot be claimed.
Over-contributions
- You can over-contribute to your RRSP up to $2,000 (lifetime). While this is designed as a “cushion,” many investors purposely make the over-contribution to have the extra funds working for them tax-sheltered.
- The penalty for over-contributing beyond the $2,000 limit is 1% on the excess amount per month.
- The excess amount may be withdrawn (in cash or in-kind) if the over-contribution was accidental.
- The over-contribution can be used as deductions in future years.
Investing
- Canadian investors can invest up to 100% of their retirement plans into foreign securities without penalty.
- Opportunities for money managers to seek out the best investment opportunities wherever they exist are wonderful news for Canadians and provide the opportunity for greater diversity and more attractive risk-adjusted returns.
Spousal RRSPs
- All or a portion of your contribution can be made to a spousal plan (in your spouse’s name), but you get the deduction as the contributor.
- Contributing to a spousal RRSP can be an effective way of income splitting since the income that will be eventually withdrawn from the RRSP will be taxed in the hands of the spouse, who will be in a lower tax bracket.
- Attribution rules state that any funds withdrawn from a Spousal RRSP in the year or two years following a spousal contribution must be taxed in the hands of the contributor. The amount taxable will be the lesser of the amount withdrawn or the contribution amount.
Contribution carry forwards
You can carry forward unused contribution room from 1991 onwards. If you did not make your maximum contribution in any year since then, the leftover amount could be added to your current contribution limit.
When you turn 71
- You must collapse your RRSP funds by December 31 of the year you turn 71.
- If you are eligible to contribute, you must do so by December 31 (not the first 60 days of the following year).
- Once you have collapsed your RRSP, you can still contribute to a spousal RRSP, provided your spouse is 71 or younger, and you continue to have earned income.
Retirement income options: you have three options when collapsing your RRSP
- Roll your funds into a Registered Retirement Income Fund (RRIF);
- Purchase an annuity;
- Take your RRSP savings in one lump sum payment.
The third option is generally not advisable since cashing in your RRSP means being taxed on the whole amount, which could result in a hefty tax bill. Converting to an RRIF is the right choice for most investors because an RRIF is the most flexible of your retirement income options.
If you would like additional information on RRSPs, RRIFs or annuities, please contact a Scotia Wealth Management relationship manager.