What you need to know about RRSPs this year

Registered Retirement Savings Plans (RRSPs) are one of the best tax-deferral strategies available to Canadians. When you deposit money into an RRSP account, your contribution is tax-deductible and your investments will grow tax-free until you withdraw your money. At that point, assuming that you wait to withdraw until you are retired, your income should be lower – and so should your tax rate.

Here’s what you need to know if you’re thinking about making an RRSP contribution this year:

What is the contribution deadline?
Contributions made before the first business day in March can be deducted on your tax return or carried forward and deducted on any future tax return. Contributions made after the first business day in March cannot be applied to the previous years tax return.

What is the contribution limit?
You can find your personal RRSP contribution limit on the Notice of Assessment, Notice of Reassessment or Form T1028 that you received from the Canada Revenue Agency after you filed last year’s tax return. This number includes contribution room carried forward from previous years plus the amount you are entitled to contribute based on your earned income.

What happens if I overcontribute?
In most cases, there is no penalty for overcontributions up to $2,000 – but keep in mind that people who are 18 or younger do not qualify for this $2,000 buffer. Overcontributions above $2,000 are generally subject to a penalty of 1% per month. This penalty is due no later than 90 days after the end of the year in which your plan was over its contribution limit.

What is the age limit?
You can contribute to your RRSP until the end of the year you turn 71. Keep in mind that if your spouse or common-law partner is younger than you are, you can contribute to his or her RRSP until the end of the year he or she turns 71.

What if I want to withdraw money from my RRSP?
You can withdraw funds from your RRSP at any time. However, unless you make these withdrawals under the Home Buyers’ Plan or Lifelong Learning Plan, you must report this money as taxable income on your tax return. In addition, withdrawals are subject to a withholding tax. In all provinces except Quebec, the withholding tax is 10% on amounts up to $5,000, 20% on amounts between $5,001 and $15,000, and 30% on amounts above $15,000. In Quebec, the combined federal and provincial withholding tax is 21% on amounts up to $5,000, 26% on amounts between $5,001 and $15,000, and 31% on amounts above $15,000. The amount withheld may not be sufficient to cover all the taxes due on your RRSP withdrawal – if it isn’t, you will have to pay any additional taxes owing when you file your tax return.

What happened to the foreign content limit?
Since January 1, 2005, there has been no limit on the amount of foreign content you are allowed to hold in your RRSP. Speak with me if you’d like to increase the international diversification of your retirement savings.

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