Understanding Your RRSP Contribution & Deduction Limits and Withdrawal Rules

While RRSP deduction and contribution limits are similar, there are some important differences.

Contribution limits set a cap on how much money you can contribute to an RRSP each year. Deduction limits cap how much of your annual RRSP contributions can be claimed as a deduction on your tax return.  

What is your maximum RRSP contribution limit and how much can you contribute to your RRSP?  

It’s important to know what your contribution limit is, as there are penalties for exceeding it.

Your maximum RRSP contribution limit is equal to 18% of any pre-tax income earned in the previous year. Any unused contribution room can be carried forward. So, if you contribute 8% of your pre-tax income, the remaining 10% of unused contribution room will be added to next year’s contribution limit. But remember that contributions from your employer also count toward your annual contribution limit. 

How can you determine and calculate your RRSP contribution limit for this year?

Your contribution limit will be equal to 18% of your previous year’s income, plus any contribution room carried over, but you don’t have to calculate it yourself. The Notice of Assessment issued to you by the Canada Revenue Agency (CRA) will tell you exactly what your contribution limit is. If you don’t receive a copy of your Notice of Assessment directly, you can always access it online through your CRA My Account.

Deadline to contribute to an RRSP

You can make RRSP contributions for 60 days after the end of the calendar year. The last day to make contributions for the 2023 tax year is February 29, 2024.

Who is eligible to contribute to an RRSP?

Any Canadian resident can contribute to an RRSP provided they have a Social Insurance Number, they earned an income in the previous year, and they file a tax return in Canada. There are no minimum age requirements for contributing to an RRSP, however, some financial institutions may require customers to be the age of majority to open an account. Once your account is set-up, you can continue to make contributions until the end of the year you turn 71.

What happens when you over-contribute to an RRSP?

Excess RRSP contributions will be taxed 1% per month for every month that you’re over your limit, until withdrawn. You can avoid paying the 1% tax by withdrawing any excess contributions before the end of the month in which the contribution was made. Note, it's your responsibility to keep track of your RRSP contributions to ensure you stay within the defined limits.

RRSP contribution limits are affected by several factors.

Earned income

Contribution limits are largely based on how much income you earn. Contribution limits are equal to 18% of any income earned in the previous year plus any contribution room carried over. Earned income includes any income earned through employment and from other assets like rental properties. However, other revenue sources, including income earned from pension plans, are excluded.

Pension Adjustment (PA)

Pension plans can also affect your contribution limit. Contribution limits are adjusted based on the estimated value of any pension earned over the course of the year. Any PA affecting your contribution limit will be shown on your T4.

Unused RRSP contribution room

Any contribution room not used in one tax year, gets carried over to the next tax year. That way you can make additional contributions in the future and not miss out on any of the benefits of contributing to an RRSP.

What is an RRSP deduction limit and how is it calculated?

Your RRSP deduction limit determines how much of your RRSP contribution can be claimed as a deduction when filing your income tax return. Deduction limits are capped at 18% of your previous year’s income, or a maximum limit set by the CRA.

The maximum deduction limit set by the CRA for 2023 is $30,780. But, say you earned $75,000 in income. In that case, your deduction limit would be $13,500 ($75,000 x 18%).

However, you don’t have to do the calculation yourself. Your deduction limit will be shown on the Notice of Assessment sent to you by the CRA.

How do RRSP contributions affect the deduction limit?

Unused RRSP deduction room gets carried forward to the following year. So, if you contributed less than the maximum contribution limit last year, and had deduction room remaining, that can increase your deduction limit the following year. 

RRSP withdrawal rules

There are several things you need to know when withdrawing funds from an RRSP.

RRSP withdrawal age

You need to close your RRSP accounts by December 31 of the year in which you turn 71. When you do, you’ll need to withdraw or transfer all funds held within the account to a Registered Retirement Income Fund (RRIF) or use the funds to purchase an annuity.

Limitations and penalties on early withdrawals 

Money withdrawn from an RRSP will be taxed at your marginal tax rate, regardless of when you withdraw it. The only exception is money withdrawn under the Home Buyer’s Plan or the Lifelong Learning Plan.

Withdrawals are also subject to withholding tax. Withholding tax is collected directly by your financial institution and can range from 10% to 30%, depending on where you live and how much you withdraw. If the tax withheld is less than your marginal tax rate, you’ll need to pay additional tax when you file your tax return. If you’re retired and in a lower tax bracket than you were when you were working, then you may end up paying less tax than you would have paid when the income was earned.

Withdrawal strategy

When and how you make withdrawals can affect how much tax you pay. RRSPs are most beneficial if you’re in a lower tax bracket when you withdraw the money than you were when you earned it. That’s why it’s often better to defer making withdrawals as long as possible. So be sure to consider whether making additional withdrawals could put you into a higher tax bracket. Depending on your financial situation, you may be better off making smaller, staggered withdrawals than you’d be if you took out larger bulk withdrawals.

Tax implications on RRSP withdrawals 

Funds withdrawn from an RRSP before retirement will be subject to withholding tax. The amount of tax withheld will depend on where you live and how much you choose to withdraw.

As of publication, withholding tax rates for Canadian residents are as follows:

• 10% (5% in Quebec) on amounts up to $5,000
  
• 20% (10% in Quebec) on amounts over $5,000 up to and including $15,000
• 30% (15% in Quebec) on amounts over $15,000

Residents of Québec will also pay an extra 15% in provincial sales tax in addition to the above rates.

Non-residents will be taxed at a 25% rate regardless of how much they withdraw.

You need to declare RRSP withdrawals as income on your tax return. Ask your financial institution for a T4RSP showing how much you withdrew and how much tax was withheld.

Income tax rates for the current year can be found on the Canada Revenue Agency (CRA) website.

How do I withdraw money from an RRSP before retirement?

You can withdraw money from your RRSP at any time, provided it’s not in a locked-in plan, but you’ll need to include it as income while filing your tax returns. Moreover, withdrawals will be subject to withholding taxes.

TD Direct Investing makes it easy to make withdrawals using WebBroker. If you withdraw some of your money, your RRSP account will stay open. But if you withdraw all your money, your RRSP account will need to be closed.

How do I avoid paying tax on RRSP withdrawals? 

You won’t pay tax on withdrawals used to buy a home as part of the Home Buyer’s Plan or withdrawals used to pay for you or your partner’s education under the Lifelong Learning Plan. However, withdrawals under these plans are like loans from your RRSP account, which must be paid back within a stipulated period of time, otherwise it gets qualified as income and subject to taxes. Unfortunately, you’ll have to pay tax on all other withdrawals.

How do RRSP withdrawals affect my contribution room? 

When you make withdrawals from your RRSP, you lose that contribution room forever. Unlike Tax-Free Savings Account (TFSA), the withdrawn amount is not added back to your contribution room. Moreover, you’ll have to pay taxes on any amount you withdraw.

Do you have to pay back RRSP withdrawals? 

Funds withdrawn under the Home Buyers Plan must be paid back within 15 years of being withdrawn. You’ll start making repayments in the second year after you withdraw the funds and need to pay back 1/15^th of the amount you borrowed each year. Funds withdrawn under the Lifelong Learning Plan typically need to be paid back within 10 years, so you’ll need to pay 10% of the total amount withdrawn each year. 

RRSPs make it easy to help save for your retirement. They provide several different tax benefits and investments held within an RRSP are permitted to grow tax-free for as long as they are held in your account. Understanding RRSP contribution and deduction limits, and rules governing withdrawals, can help you make the most of your RRSPs and reach your retirement goals faster.

The best part? All you need to do to start saving is to open up an RRSP. If you don’t already have one, you can open one quickly and easily today with TD Direct Investing.