Registered retirement savings plan (RRSP)
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a savings account designed to help Canadians save for retirement.
Contributing to an RRSP
How much you can contribute to your RRSP depends on your deduction limit, often referred to as your “contribution room”. Your contribution room is the maximum amount you can deduct to reduce taxes for a given year. To find out your contribution room for the current year, refer to your most recent Notice of Assessment from the CRA, which can be found on your previous year’s tax return.
Calculating your contribution room
The maximum RRSP contribution and deduction limits are determined as follows:
- 2021: 18% of previous year’s earned income up to $27,8301
- Plus (+)
- Current year’s Pension Adjustment Reversal (PAR)
- Unused contribution room carried forward from previous years
- Minus (-)
- Previous year’s Pension Adjustment (PA)
- Current year’s Past Service Pension Adjustment (PSPA) [1]
Contribution rules
• Unused contribution room can be carried forward to use in any future year
• Contributions are deductible for the specific year when made during the year, or within 60 days following the year
• Contributions not deducted may be carried forward and deducted in a future year
• Contributions to an individual RRSP can be made up to December 31 of the year in which the annuitant turns 71
• You may contribute up to $2,000 above your annual contribution room without penalty. However, the excess amount will not be allowed as a tax deduction and any amount over $2,000 will be subject to a 1% per month penalty tax
RRSP Maturity Options
You can make contributions to your RRSP up to and including the year in which you turn 71. Your RRSP must mature by December 31 of that year, at which time, you will have three options:
- Cash out the plan – the full value of the lump sum withdrawal will be added to your income for the year and taxed accordingly
- Use the funds in the plan to purchase an annuity
- Convert the plan to a Registered Retirement Income Fund (RRIF)
Spousal RRSP
Contributing to a spousal RRSP can help defer tax for the higher income earner and potentially reduce the family’s overall tax bill at retirement. A spousal RRSP allows you to contribute to your spouse’s or common-law partner’s RRSP, up to your personal contribution room.
• Contributor claims the deduction for contributions to a spousal RRSP
• Deduction limit is based on the contributor’s RRSP contribution room
• Plan and assets within the RRSP are controlled by the spouse
• Withdrawals will be added to the contributor’s taxable income, unless the contributions are held in the plan for at least two years after the end of the year in which the last contribution was made
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows you to borrow up to $35,000 from your current RRSP balance, tax free, to buy or build a qualifying home. The plan is restricted to first-time buyers who have not owned and lived in a principal residence during the five years up to and including the current year. From the date of withdrawal, you will have up to 15 years to repay the amount withdrawn from your RRSP. The repayment period starts the second year after the year in which the funds are first withdrawn.
The home cannot be acquired more than 30 days prior to the withdrawal and must be acquired by October 1 of the year following the year of withdrawal. Otherwise, the amounts withdrawn must be returned to the RRSP by the end of that year to avoid penalty. Any amount not repaid will be taxed as income.
Lifelong Learning Plan
The Lifelong Learning Plan allows you to finance a full-time training or education program by borrowing up to $10,000 per year, tax free, from your RRSP to a maximum of $20,000.[2]
The student may be you, your spouse or common-law partner and must be enrolled as a full-time student in a qualifying educational program. Any amounts withdrawn must be repaid to your RRSP within a ten-year time frame to avoid penalty.
[1]Earned income includes employment income, net self-employment or business income, and certain other types of income that may also qualify. The amount that can be withdrawn from your RRSP cannot exceed the value of your RRSP account. For example, if you have $5,000 in your RRSP, the maximum you can withdraw is $5,000.
[2] Note: It is not possible to withdraw more funds than currently exist within your RRSP account. If you only have $5,000 in your RRSP, the maximum you can withdraw is $5,000.
