Making Your RRSP Contribution - What You Need To Know

When my clients contact me at this time of year to make an RRSP contribution, the decision is usually fueled by a desire to reduce taxes payable for the past year. The choice of making an RRSP contribution should be part of an overall financial plan but, sometimes, you've got to do what you've got to do! As such, here are the five things you need to know about making an RRSP contribution and have it count against your 2023 tax bill:

What is the deadline to contribute?

Any contribution you make to an RRSP up to and including February 29, 2024 may be used against your 2023 taxable income. You may reduce the amount of your taxable income for 2023 by the dollar amount that you contribute to your RRSP. You do not have to use all of the contribution against your 2023 income; you can use it toward a future year, as well.

What is the dollar limit that I can contribute?

Your RRSP contribution limit for 2023 is 18% of earned income you reported on your tax return in the previous year (2022), up to a maximum of $30,780. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the pension adjustment. The pension adjustment is calculated by your employer and reported to the CRA on your T4 each year. If you're a member of a registered pension plan (RPP) or deferred profit sharing plan (DPSP), your pension adjustment is the total contributions to the plan made by you and your employer. If your RPP is defined benefit, your pension adjustment is determined by a formula designed to reflect the pension benefit entitlement you earned in the year.

Can I contribute more than my limit?

You may actually have more contribution room than you think. If you have not maximized your RRSP contribution in the past, unused room carries forward. That is, you can make catch-up contributions and use the deductions today. Be careful not to over-contribute, though, as the financial penalties are significant. Canada Revenue Agency allows you to over-contribute to your RRSP by up to $2,000 without being penalized. However, you cannot claim a deduction for the excess amount. If you over-contribute by more than $2,000, you are subject to a 1% penalty tax for each month you are in excess of that. The easiest way to determine your personal RRSP limit is to refer to your most recent Notice of Assessment which provides your RRSP contribution limit.

What should I invest in?

Your RRSP investments should be part of an overall financial/investment strategy. If you are making a lump sum contribution today, it is likely motivated by tax reasons. If you do not have an existing investment plan, it is best to just make the contribution and deposit it temporarily into something safe where you can reallocate the money in the future when you have more time to put together an investment plan.

Can I borrow money for my RRSP contribution?

Many financial institutions offer "RRSP Loans” which are designed to offer quick approvals for last minute contributions, flexible repayment options, and competitive borrowing rates. It is important to note that unlike non-RRSP investment loans, any costs associated with borrowing are not tax deductible.

When used properly, RRSPs can be one of the most powerful vehicles in your financial model. The key to success is to know how and when to deploy RRSPs, and also when to surrender the investments so that you can take full advantage of our tax system. There are potential risks involved where losses are magnified when borrowing to invest for either a registered retirement savings plan or an investment term loan making this strategy not suitable for everyone.