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How RRSP Contributions Work

A registered retirement savings plan (RRSP) is an account you can set up to save money for the future. There are immediate tax benefits in the year that a contribution is made to the plan. Also, RRSP investments can grow and not be taxed until the funds are withdrawn, often many years later.

But the big question is: how do RRSP contributions work?

Any taxpayer is entitled to contribute to an RRSP if they have “contribution room” (also called the deduction limit), although the contribution room is subject to an annual maximum limit.

The RRSP annual maximum limit for 2012 is $22,970 and for 2013, it is $23,820. In order to be eligible for this maximum limit, you must have had sufficient earned income in the previous tax year.  So this year’s limit is based in part on last year’s earned income (primarily employment or business income). Your deduction limit can exceed this amount if you have unused contributions carried forward from previous years.

The Canadian Revenue Agency (the “CRA”) calculates the RRSP deduction limit for the following year on every Notice of Assessment (“NOA”), which you receive each year after you file your income tax return (i.e. your 2013 annual limit will be reported on your 2012 NOA). Therefore, a taxpayer can simply refer to their NOA to determine their limit.

Excess Contributions

Excess contributions occur when you contribute more that you are permitted by more than $2,000. When contributions have been made of more than $2,000 over the contribution limit, a penalty of 1% per month is charged on this excess amount, until the excess contribution is removed from the plan.  Excess contributions are to be avoided at all costs, so if you are in doubt about how much to contribute to your RRSP, check it out carefully before you contribute.

When is the deadline for contributions?

The RRSP contribution deadline for the 2012 tax year is March 1, 2013. Therefore, if you contribute to your RRSP on March 1, 2013 or earlier, you can take the deduction on your 2012 tax return.

The very last contribution you can make to your RRSP is December 32 of the year you turn 71. However, it is possible for taxpayers over 71 to contribute to the RRSP of a spouse until December 32 of the year that their spouse turns 71.

The earlier you contribute to your RRSP, the more time you have for investments to grow tax free – so don’t wait until the deadline to contribute! Also the younger you start your RRSP account the better – compounding of income really takes off if you have a long period of time to run your RRSP.

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