RRSP facts you must remember this year and beyond!
To help you make the most of your Registered Retirement Savings Plan (RRSP) before the RRSP contribution deadline, coming up very soon (!), I thought I would list some of my favourite RRSP facts for this tax year and beyond.
RRSP facts and tips for this 2022 tax year
You should know the deadline to make RRSP contributions for the 2022 tax year is March 1, 2023.
That’s the deadline for contributing to an RRSP for the 2022 tax year (last year).
December 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP.
If you’re already lucky enough to have maxed out your RRSP and Tax Free Savings Account (TFSA), read up on how to invest in a taxable account here.
You don’t have to wait until March every year/”RRSP season” to make your RRSP contribution.
Some investors believe “RRSP season” starts in the late-winter and early spring. Not true.
What’s important to remember is you can make your RRSP contribution from March to December, each tax year, AND/OR you can make your RRSP contribution in the first 60 days of the year that follows for the tax year (as in January 1 to March 1, 2023) up to any RRSP available contribution limit.
What’s also important to remember is just because you make the RRSP contribution, up to your contribution limit, that doesn’t you must claim your RRSP contribution for a tax deduction.
So, a reminder you have 60 days after the end of the year, usually March 1, to put money in your RRSP to get a tax deduction for the previous year. But don’t wait until the deadline. Begin regular contributions (monthly or every payday) as soon as possible and your investment savings will start to grow sooner.
Your RRSP contribution room is based on 18% of your earned income from the previous year, up to a maximum contribution limit this tax year.
The maximum contribution for 2022 is $29,210.
The 2023 limit is $30,780.
I know my RRSP contribution limit thanks to my recent Canada Revenue Agency (CRA) Notice of Assessment (NOA). My CRA NOA includes employment income, net rental income, self-employed income and more.
So, unless you’re a member of a workplace pension plan or profit sharing plan then your RRSP contribution room should be up to 18% of your earned income (not adjusted for these pensions above) to a maximum annual contribution amount.
CRA keeps tabs on your RRSP contributions.
- The total amount you can contribute to your RRSP each year will be limited to 18% of your previous years’ earned income or up to a maximum amount (see above) plus any carry-forward contribution room that you may have.
- Please know if you have a company pension plan or profit sharing plan your RRSP contribution limit is reduced. This is my case actually.
- Both your annual contribution limit and any carry-forward contribution room are shown on your notice of assessment.
Some quick RRSP facts and tips for any tax year
- An RRSP is an account. So please tell others to stop saying “I have to buy RRSPs!”
- Contributions to an RRSP are tax deductible. This means you can use these tax deductions to reduce your taxable income.
- Some Canadians shouldn’t use an RRSP. Gasp!!! Why do I say that???
RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
This means, there are really two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction today from your RRSP contribution, and
- tax deferred growth.
Should you use the RRSP or the TFSA to invest?
My bottom line on this:
The RRSP vs. TFSA investing debate can be summarized in one sentence instead of reading 43,129 articles every year on this subject:
Is there a penalty if you over-contribute to my RRSP?
There are penalties if you over-contribute to your RRSP although a small exemption exists.
Do you have to pay taxes on my RRSP withdrawals?
Remember, RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years.
Also remember the RRSP is a tax-deferred account – you’re not as rich as you think: when you take money out of the RRSP account you have to pay tax.
Now, some exceptions apply: RRSPs can be used for home purchases and education and there are programs associated with the RRSP for this. See below for my takes on these.
There are rules and age restrictions when you must collapse the account. In fact, Canadian taxpayers can contribute to their RRSP right up until December 31st in the year they turn age 71.
Back to RRSP withdrawals, if you withdraw money from your RRSP before you turn it into a Registered Retirement Income Fund (RRIF), *withholding taxes will apply to RRSP withdrawals:
- If you take up to $5,000, you’re going to pay 10%.
- If withdrawals are between $5,000 and $15,000, the financial institution will hold back 20%.
- If you withdraw more than $15,000, 30% is held back.
It’s also important to keep in mind that this won’t be the only time you’ll be taxed…
The amount you withdraw from an RRSP will count as income, so you’ll have to declare it once you do your tax declaration for the year that you’ve withdrawn. If the withdrawal ends up putting you in a higher tax bracket, you’ll have to pay more income tax, since the withdrawal tax likely won’t cover the full amount of income tax you’ll owe. That’s why withdrawing prematurely from an RRSP is not a great move and should be a final last resort decision.
When you withdraw from your RRSP, your financial institution will provide a T4RSP showing the amount you withdrew, and how much tax was withheld. You must declare this amount on your T1 General Income Tax Return in the calendar year you withdrew it. You can find the income tax rates for the current year on the Canada Revenue Agency (CRA) website.
So, RRSP withdrawals count on your tax return as income. At that time, you may have to pay more tax on the money — on top of the withholding tax. It depends on your total income and tax situation.
*Quebec has some different rates for withholding taxes.
These are just some of the RRSP facts.
Other RRSP uses?
There are two important programs you can use to take money out of an RRSP without incurring taxes – but be careful!
There are two programs you can use to take money out of an RRSP without incurring taxes – but be careful!
1.The Home Buyers’ Plan (HBP) allows you to take tens of thousands out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. That’s the good news. The bad news? You’ll have to pay that back into your RRSP over the next 15 years.
2.The Lifelong Learning Plan (LLP) allows you to take out up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your or your spouse’s education. You can’t use it for your child’s education – this is where RESPs come into play. You do have to pay back 10% per year for up to 10 years.
These are just some of the RRSP facts and uses you need to know!
The punchline – why RRSPs should matter to you!
Again, as referenced above, there are two great tax benefits that RRSPs provide Canadian investors:
- a tax deduction today from your RRSP contribution, and
- tax deferred growth.
With your tax deduction, you can reduce the taxes you pay today.
With tax deferred growth, investments in your RRSP can compound over time without being taxed as long as money made stays in the account.
Based on our long-term investment plans – we strive to maximize contributions to both our RRSPs – every single year.
RRSP “do’s” and “don’ts” for this year!
- Do use the RRSP to reduce your reduce your taxable income. If you’re in a high tax bracket, contributions to your RRSP could help push you into a lower tax bracket. You’ll also receive a tax receipt based on the amount of money you contribute, which you should always re-contribute.
- Don’t bother using the Home Buyers’ Plan personally. With so much TFSA contribution room available to every adult Canadian now, I see no reason why this plan should be used. See above!
- Don’t consider the RRSP-generated tax refund as a financial windfall. It’s essentially a tax-deferred government loan to you and you’ll need to pay taxes on RRSP withdrawals.
- Don’t contribute to an RRSP if your earned income is less than $50,000. I think it makes far more sense to maximize contributions to your TFSA first. After you max out your TFSA, then contribute to your RRSP. The TFSA is the perfect investing account for every Canadian, including those in lower tax brackets who will end up in a similar income bracket in retirement. The TFSA is also an ideal account for any investor who cannot or will not max out their RRSP contribution room.
- Don’t bother with any RRSP loan. That’s generally a bad idea. I mean it. Yes, while a short-term loan to contribute to your RRSP might sound like a good idea – let’s face it – borrowing for investing is not generally a good idea for most of us. Especially if you have a large mortgage already. Instead, get your emergency fund in place. Pay off all consumer debt. Pay down your mortgage or car loan debt without fail. Contribute to your TFSA for tax-free wealth-building AND then contribute to your RRSP if that makes sense – if you have more money leftover. Don’t dig yourself another financial hole. If you cannot afford to make regular RRSP contributions in the first place then I don’t believe you should consider any RRSP loan.
RRSP contributions can work wonders over time…
Consider a 25-year-old that started with just $1,000 in their RRSP in that year.
If said 25-year-old consistently socked away $500 per month for the next 35 years, at 7% average rate of return for 35 years, they would have a nearly a million dollar portfolio in their RRSP by age 60 for retirement.
My go-to RRSP calculator at Get Smarter About Money from my Helpful Sites page.
Add on CPP and OAS government benefits in your 60s, and that’s a very healthy retirement for many Canadians who have no debt.
That could be your portfolio value if you follow my guidelines!
Happy investing this “RRSP season” and ideally throughout the year.
Other RRSP reading:
Can you have too much in your RRSP?? Yes but a very nice problem to have!!
How soon can you retire using your RRSP? Read on for an answer here.