How much should you contribute to your RRSP? All you need to know
The March 1, 2019 RRSP contribution deadline approaches! As such, many Canadians are about to make a last minute contribution to their RRSP account.
RRSP contribution deadlines for 2018 tax year
- December 31, 2018
- March 1 (First 60 days of 2019).
Here are some important deadlines to remember at this time. Make sure your personal contact information is up-to-date, so you have all of the documents you need to file your taxes.
You may get additional documents from other financial institutions, wherever you have accounts. Our financial advisers are here to help if you have any questions!
Stressed about the RRSP contribution deadline? Set up automatic contributions
The Canada Revenue Agency (CRA) lets you make RRSP contributions for the previous tax year, in the first 60 days of the following year. They do this to give you time to find out how much employment income you earned in the last tax year.
It’s common for people to set up automatic contributions. They’re investing on autopilot throughout the year. Even if you did that, you might have some unused contribution room afterwards.
(By the way, our advice is to set up a regular contribution plan that lines up with your payroll deposit, so that it’s an automatic habit and you can get on with more important things than worrying about your savings.)
On the other hand, many people wait to the last minute. That’s just human nature. If you were unable to contribute regularly throughout the year, that’s OK. Now you can make a one time lump sum deposit before the deadline. Here’s what you have to do.
What is your RRSP limit?
With the deadline looming, you may wonder “How much can I contribute to my RRSP?”
The simple answer is “18% of your income, each year.” However, there are some additional details to understand.
RRSP contribution limits are based on earned income. This includes employment income, net rental income, self employed business income, and more.
It does not include things like investment income, capital gains, and pension income (For a comprehensive list of what does and doesn’t count see this article by Grant Thornton).
So, 18% of your previous year’s earned income is added as RRSP room for the current year, up to an annual maximum amount. For the 2018 tax year the maximum is $26,500 (CRA keeps a list of the RRSP limit, as well as some others, here).
Unused RRSP contribution room carries forward
Couldn’t maximize your contributions last year? No problem. Whatever room was left is added to your contribution limit for this year.
What about pension income and RRSPs?
Are you a member of a pension plan or deferred profit sharing plan? Then your RRSP room will be reduced by something referred to as a Pension Adjustment. This represents the current value of the pension benefits you accumulated in the year.
What’s the difference between an RRSP and a TFSA?
A lot of Canadians start thinking about TFSA accounts around this time. That’s not a bad thing.
For now, what you need to know is that your RRSP is great for long-term retirement savings. The TFSA is used more to improve cash flow for short-to-medium term budget items. Here’s a helpful overview showing the difference between a TFSA and RRSP. But for now, let’s get your RRSP sorted, since the TFSA doesn’t have a contribution deadline coming soon.
Remember what your RRSP is for: saving for retirement
Your RRSP is not an emergency fund. Taking money out of your RRSP during the year will negatively impact your contribution limit. Avoid it, if at all possible.
With automatic contributions, the RRSP contribution deadline may loom less large
After all, it’s not always easy to come up with a large lump sum payment of several thousand dollars all at once. (And if you’re thinking about borrowing to invest in your RRSP… don’t.) Setting up a regular contribution like this with your payroll helps you feel better about your financial future.