A Registered Retirement Savings Plan (RRSP) is a program regulated by the federal government of Canada, offering tax advantages to help Canadian residents accumulate financial wealth, through a wide range of investment instruments, in order to provide financial security and income during retirement. RRSP contributions reduce your taxable income by the contributed amount. The deadline is normally March 1, but in the case of a leap year, it’s February 29.
The program is quite simple and is designed to provide you with the tax benefit immediately. Withdrawals from an RRSP will be added to the individual’s taxable income. That’s why, it’s generally best to make the contributions during your high income working years and then make the withdrawals later in life upon retirement as your income level decreases.
Your RRSP contribution room can be found on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment.
The RRSP deduction limit is calculated by:
- Taking the lesser of 18% of your previous years earned income from the immediately preceding year or the RRSP Dollar Limit for the year
- LESS: The your previous year’s pension adjustment (PA) reported on your T4 if you were a participant of your company’s deferred profit sharing program (DPSP) or registered pension plan (RPP)
- PLUS: Unused deduction room carried forward from prior years
- PLUS: Pension adjustment reversal from past years
- LESS: Net past service pension adjustment (Net PSPA)
The amount to contribute to RRSP will depend on each individual and the province they reside in. As a rule of thumb, you never want to make an RRSP contribution if your income at retirement will be the same or higher. You also should avoid RRSP contributions is your income is within the first tax bracket ($42,000 or under). In that case, a tax free savings plan is a much better option.
So how much will I save in taxes if I make an RRSP contribution?
The answer to this question depends on your marginal tax rate and the province of residence.
- An individual earning $70,000 annually in Quebec, is paying tax at the marginal rate of 38.37%. So for every $1000 RRSP contribution, he/she will save $383.70 in tax.
- An individual earning $95,000 annually in Quebec is paying tax at the marginal rate of 45.71%. So for every $1000 RRSP contribution, he/she will save $457.10 in tax.
In all cases, the higher your level of income, the greater tax benefit you will receive by making an RRSP contribution.