5 What is my RRSP Contribution Limit?

The month of March is fast approaching and a popular question is “What is my RRSP contribution limit”? On top of that, there are other questions surrounding RRSPs that require answers. I’ve compiled some answers to some of the more frequently asked questions around RRSPs.

1. When is the deadline?

February 28, 2018 is the deadline for contributions for the 2016 tax year, and that means the latest you can contribute is by the end of business day on March 1st. If you plan on contributing in person, be sure to check your financial institution’s hours that day so you don’t show up to find the lights out. There’s no pleading for an extension.

2. What is my RRSP Contribution Limit?

There are limits to how much you can contribute and financial penalties for contributing too much.

Your RRSP contribution limit for the year is the lesser of 18 per cent of your earned income for the previous year, or the maximum contribution amount for the current tax year: $26,010 for 2017.

However, you might be able to put in more than that if you have carry-forward room from past years when you didn’t contribute. You can find this information on your notice of assessment from the previous year and will want to know what that number is to avoid over-contributing.

If you don’t have the extra money around but have decided it is necessary to make the contribution, consider taking it from your TFSA [tax-free savings account] or other savings.

3. Should I consider borrowing?

If you don’t happen to have a small chunk of change in a savings account but want to contribute toward those tax-deferred, tax-sheltered savings, look at other options.

Some of the lowest cost borrowing available is for RSP contributions.

There’s an RSP loan and RSP line of credit, both of which tend to have very quick approval times.

4. How much should I invest into RRSPs?

When you’re scrambling to get a contribution in, it’s easy to overlook important details like your financial needs and goals, both short- and long-term. In an ideal world, contributions would be considered within a broader, comprehensive financial plan.

At this time of year, advisors and investors might not have the time to do a full risk and investment analysis to make a full investment recommendation. If you’re parking the money, be sure to follow up to ensure it gets invested properly.

5. Should I consider other investments?

Despite the benefits of having an RRSP, it’s possible it’s not the right savings vehicle for you. A TFSA may be a better option. Generally, low-income earners (less than $35,000) should look at tax-free savings accounts, since they’re not going to reap the advantages of the tax savings of RRSPs the way higher-income earners do.

Plus, in retirement, withdrawals from RRSPs and RRIFs can lead to clawbacks of Old Age Security and other government programs like the Guaranteed Income Supplement. “The lower the income, the more likely people will be recipients of those government income-tested benefits in retirement.

Reach out to the financial professionals in your life to see if it makes sense for you to contribute to an RRSP.

6. Are RRSPs right for me?

Remember that RRSPs are meant for the distant future.

You don’t want to put money into an RRSP only to have to dip into it two years later. If you have excessive existing high-interest consumer debt (such as credit-card debt) or you’re lacking an emergency savings fund, you may be better off eliminating or reducing that debt or directing your hard-earned money elsewhere.

Financial experts suggest having savings to cover at least three to six months’ worth of expenses on hand. If you have to withdraw from your RRSP, that money will count as income and you’ll pay taxes accordingly.

7. What kind of refund should I expect?

If you don’t happen to have a small chunk of change in a savings account but want to contribute toward those tax-deferred, tax-sheltered savings, look at other options.

We’ve run the numbers to see what kind of refund you can expect to pay if you’re a salaried employee with no company pension. These numbers were run based on Ontario tax rates and assume you have paid federal and provincial taxes all year long. They also assume you have made the maximum RRSP contribution of 18% of last year’s income for your salary level, or the maximum allowed, as in the case of the $150,000 earned income example.