RRSPs are very well know accounts that have been around since 1956. People always want to know if they should buy RRSPs or not. There are four ways to figure out how much you can contribute to a RRSP: the harder way and three easier ways. Personally, I like easier way.
The harder way
Basically, there is a formula to determining your RRSP contribution limit which goes like this:
18% of your previous year’s earned income less your previous year’s pension adjustment to an annual maximum.
To properly understand this formula, you need to understand a few terms:
- Earned income – earned income is different than your taxable income or net income for tax purposes. Earned income includes employment salary (including taxable benefits), self employed income, rental and royalty income, taxable child and spousal support payments, research grants, CPP disability payments, employee profit sharing plans and supplementary unemployment benefits (not regular EI benefits)
- Pension Adjustment (PA) – The pension adjustment is used to ensure there is fairness between those that are part of a pension plan and those that are not part of a pension plan. If you are members of a pension plan through work, you will be able to contribute less to an RRSP because of your pension contributions. For defined contribution plans, the PA is simply the total of employee contributions and employer contributions. For defined contributions, the formula to calculate the PA is more complicated.
- Previous year – one of the mistakes I see people make it they take their current year’s projected income and multiply by 18%. The current year’s RRSP limit is always based on the previous year’s earned income and pension adjustment
- Annual maximum – The maximum RRSP contribution limit is set every year by the government. Here’s a list of RRSP contribution limits dating back to 1992
|Tax Year||Income from||RRSP Maximum Limit|
RRSP contribution room accumulated after 1990 can be carried forward to subsequent years. In other words, if you are unable to maximize your RRSP contribution in any given year, the unused room is carried forward indefinitely. As a result, for people who do not maximize their contributions every year, their RRSP contribution limit continues to grow and the best way to know how much you can contribute to a RRSP is to look a the three easier ways to determine your limit.RRSP Carryforward.
Three easier ways
- Notice of Assessment – The easiest way to find out how much you can contribute to an RRSP is to simply look at your last Notice of Assessment. This is the form that Canada Revenue Agency (CRA) sends you after you have filed your tax return. The notice of assessment takes into consideration all of the RRSP carryforward that has not been used in the past.
- Call the TIPS line – The Tax Information Phone Service (TIPS) number is 1-800-267-6999. To get your RRSP limit, you will need your Social Insurance Number (SIN), your month and year of birth, and the total income you reported on line 150 of your income tax return for the previous year. This means you will have to find your tax return anyway, so it’s probably easier just to get your notice of assessment.
- CRA Quick Access Service – This service is an online version of TIPS. It also requires line 150 of your last annual tax return, your SIN and your date of birth.
Don’t contribute more than your limit
The RRSP rules allow an overcontribution of only $2000 beyond your maximum limit. Any amount in excess of $2,000 will be charged a penalty of 1% per month.