Insights & advice
RRSP contribution limits and how to contribute
February 2023 – 15 min read
There are 3 factors that determine your RRSP contribution limit
There are penalties for contributing too much to your RRSP
There are effective strategies for contributing to your RRSP and making the most of those contributions
Why contribute to an RRSP?
A registered retirement saving plan (RRSP) is the foundation of retirement funding for many Canadians. RRSPs can help you:
- Pay less tax now
- Pay no tax on the growth of your investments until you withdraw the money
- Help buy your first home or fund your education
How an RRSP works
- Your annual contributions can be deducted from your taxable income, thereby reducing your overall tax bill.
- Any investment growth grows tax free.
- You can access money when you need it, but withdrawals are taxable.
- Alternatively, you can withdraw tax-free to buy your first home or for you or your spouse’s education, if you qualify.
- When you’re ready to retire or you turn 71, your RRSP converts to a registered retirement income fund (RRIF) where you must withdraw your minimum annual amount. Alternatively, you can purchase an income annuity.
- You can contribute to an individual RRSP, a spousal RRSP, or a group RRSP.
How to contribute to an RRSP
- Talk to an advisor to open your RRSP with investments that match your retirement goals and risk tolerance
- Determine the contribution amount that fits your situation, making sure you don’t go over your contribution room
- Figure how you want to make your contributions (automatically from your bank account, regular lump sum amounts, etc.)
- The last day to contribute to your RRSP or your spouse’s RRSP to claim a deduction on your 2022 tax return is March 1, 2023
- You can contribute to an RRSP until Dec. 31 of the year you turn 71 years-of-age
How much you can contribute to your RRSP
Generally, your contribution limit is calculated by the Canada Revenue Agency based on 3 factors:
- Total of your unused deduction room from the previous year from your most recent Notice of Assessment from Canada Revenue Agency (CRA)
- Add the smaller amount of:
- 18% of the earned income you reported on your tax return last year
- $29,210 (the annual limit for 2022)
- Subtract any company-sponsored pension plan contributions (if applicable). This can also be found in your Notice of Assessment.
|Year||RRSP contribution limit|
RRSP over contribution
You’ll be taxed 1% per month on any amount that is more than $2,000 over your contribution limit. If you don’t pay the additional tax within 90 days after the calendar year, you’ll face an additional penalty equal to 5% of the taxes you owe plus an extra 1% for every month, to a maximum of 12 months.
The CRA - Opens in a new window could potentially waive or cancel the tax if you submit:
- A request to cancel or waive the tax
- Copies of your RRSP statement that shows the date you withdrew your excess contributions
- Any other correspondence that shows your excess contributions are due to a reasonable error
How much you should contribute to your RRSP
When you meet with your advisor, you can discuss your current financial situation and goals, and how much you might be able to contribute to save for your retirement. Here are some contribution strategies to consider:
Let’s say your annual taxable income is $46,000 and your unused RRSP contribution room is $15,000. Now let’s say you just received $15,000 cash. You could contribute it all to your RRSP and deduct the full amount this year. If you do, your income tax savings is approximately $4,032.
Partial contribution over multiple years
Rather than put the entire $15,000 into your RRSP at once, you could instead contribute it over 3 years. If your annual income stays the same, contribution $5,000 per year saves about $4,209 total income tax. That's $177 more compared to using the entire tax deduction immediately. You save more tax because smaller deductions over 3 years keeps your earnings below the start of the higher tax bracket for all 3 years.
Sometimes it’ smarter to stall making your maximum RRSP contribution. If you just started a job mid-year, next year you'll be taxed on a whole year's salary. However, this year, your income will be lower than usual. You can save some of your new pay right away but using the maximum RRSP contribution next year could save you more tax.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
If your taxable income will fall next year because you're starting a business or going part-time, accelerating your RRSP contribution now when your taxable income is higher, and using all your RRSP contribution room might save you more tax than contributing later.
Claiming RRSP contributions on your income tax return
The financial institution your RRSP is invested with will provide a receipt for the amounts you contributed.
If you contributed to your spouse's or common-law partner's RRSP, the receipt should show your name as the contributor and your spouse's name or common-law partner's name as the annuitant.
Deduct your contributions on line 20800 – RRSP deduction - Opens in a new window of your income tax return.
If you file a paper income tax return, attach the receipt(s).
If you use EFILE, show your receipt(s) to your tax preparer, then keep them in case the CRA asks to see them.
If you use NETFILE, keep your receipt(s) in case the CRA asks to see them.
Making the most of your RRSP contributions
Here are some RRSP strategies to make the most of the money you contribute.
Pre-authorized contribution plan
This helps you make regular, automatic contributions to your investments. It’s “paying yourself first” by treating regular saving like any re-occurring bill payment.
This strategy can be effective because contributing more frequently gives you the advantage of dollar-cost averaging. That means investing smaller amounts at regular intervals, rather than saving up to invest in one lump sum. It can help you avoid jumping into the market at peak times by purchasing more fund units when values are low and fewer fund units when values are high.
You can also gradually increase the amount you contribute over time as your income grows. It’s like giving your investments an annual raise, which can make a big difference to your savings over time.
Catch up on unused RRSP contribution room with an RRSP loan
An RRSP loan can boost your savings by allowing you to catch up on RRSP contributions. By catching up on contributions using a loan1, you’re giving your investments the most available time to grow. It helps you now, and in the future, because it:
- Gives you more money earlier to grow your investment due to the effect of compound interest.
- Potentially creates a larger nest egg down the road.
- Reduces this year's tax bill through an income deduction equal to the amount of your allowable RRSP contribution.
Borrowing your RRSP contribution doesn’t have to cost a lot and you can use any tax refund to help pay down your RRSP loan. This means you’re benefitting from tax advantages right away.Despite the advantages, RRSP loans aren’t right for everyone.
Contribute to a spousal RRSP
In a spousal RRSP, the higher income spouse makes an RRSP contribution and claims the tax deduction but the other spouse owns the plan and the money in it. Spousal RRSPs are generally used to equalize income during retirement, lowering the overall family tax rate.
This type of RRSP can help if 1 spouse earns a lot more income than the other. Contributions made by the higher income spouse will reduce their individual RRSP contribution room for the year but won’t affect how much the lower income spouse can contribute to their individual RRSP.
- Footnote 1
- 1 While borrowing to invest has many potential benefits (investing an initial lump sum creates greater potential for compound-growth compared to making smaller regular investment purchases), leveraging also has potential risks (market volatility may result in poor investment returns and the possibility of owning more on the loan than the investments are worth).
Now that you know more about contributing to an RRSP, why not meet with your advisor to:
Determine how an RRSP can help you achieve your savings goals
Discover the way to contribute to your RRSP that works for your situation
Find out more about borrowing to invest in an RRSP
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.