Unused RRSP Contribution
Table of Contents
What exactly is an RRSP?
Registered Retirement Savings Plan (RRSP) is a tax-deferred retirement savings plan for Canadian residents. It provides a way to save for retirement by lowering the taxes you pay now. RRSPs are available to Canadians who are 18 years or older and have earned income. If you can maximize your investments in this account, you can look forward to a secure retired life.
What is the purpose of an RRSP?
An RRSP is a retirement savings plan Canadians use to save for retirement. The primary purpose of an RRSP is to help you save money for your retirement. You will pay less tax on the money you put into an RRSP than if you had saved it in a regular bank account because the government gives you a tax deduction when you contribute to an RRSP.
What are the benefits of contributing to an RRSP?
Contributing to an RRSP is a great way to save for retirement. RRSPs are registered pension plans regulated by the federal government. They offer tax advantages and are designed to help Canadians save for retirement. Contributing to an RRSP offers a number of benefits, such as:
- Lower taxes on income
- Tax-free savings growth
- Tax-deferred withdrawals upon retirement
How do you contribute to RRSP?
An RRSP account holds investments and provides tax advantages, but it’s not the only type of retirement savings vehicle out there. Other available avenues are Tax-Free Savings Accounts (TFSA), Registered Education Savings Plans (RESP), Registered Retirement Income Funds (RRIF), Deferred Profit Sharing Plans (DPSP), Company (employer) pension plans, and Life insurance policies with cash value.
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RRSP contributions
Every year, the CRA allows you to save a specific percentage of your income into a separate registered account, i.e., RRSP. This limit is known as the “RRSP Deduction Limit.” For 2021, CRA devised the limit to 18% of your pre-tax income up to $27,830. It was $27,230 for 2020. The stated Deduction Limit is the amount that can be deducted from your annual income for the given year. If you choose to deduct a small amount from the allocated limit, your deduction limit will go up by the excess amount.
How to figure out your unused RRSP contributions?
The first and the quickest way is to check for unused RRSP contribution limits in your Notice of Assessment (NOA). CRA provides your NOA once you file taxes with them. Among other things pertaining to your annual taxes, the notice carries how much amount you contributed during previous year and how much investment room you have for the current year.
If you do not have your NOA handy, head to the CRA MyAccount website. Use your login username and password, or sign in using your bank partner credentials. After logging in, head to the tab “RRSP and TFSA”, and select RRSP on the next page. You will find a line stating your “Unused RRSP contributions available to deduct for is $”.
How unused RRSP contributions affect your retirement income
Making a contribution to a Registered Retirement Savings Plan (RRSP) is a great way to save for retirement. But what happens when you don’t use the money in your RRSP? In Canada, unused contributions are considered income; therefore, they are subject to income tax. If you have not withdrawn your unused contributions by the end of the year, then you need to pay tax on them. Not only does it increase your present year tax burden, but it also reduces the prospects of earning on investments that support a post-retirement future.
How to take care of unused RRSP contributions
In case you missed putting money into RRSP investments, you still have a 60-day period at the beginning of next year. If you miss out on the 60-day window, your contribution room remains available indefinitely. The unused limit keeps adding every year and is available in your RRSP Deduction Limit Statement. Check your latest Notice of Assessment received from the CRA.
Let’s assume you had a RRSP deduction limit of $12,000 in 2020. But you chose to invest only an amount of $5,000. So your unused RRSP contribution room is reduced from $12,000 to $7,000. In 2021, let’s assume your contribution limit is $12,000 again. Now your RRSP contribution limit for 2021 will be $12,000 + $7,000 i.e. $19,000.
While you lose out on investment return opportunities when you do not utilize RRSP contribution room, you may be penalized for over-utilization too! If your contributions surpass the allowed limits, you are subject to pay a 1% monthly tax on the surplus amount.
Another interesting fact is that you can deduct your RRSP contributions in later years of your career. It makes more sense because you will have more income and more taxes during the later years. As you accumulate the contribution limits, you can use them to deduct from your income during later years and save on paying high taxes. Another way to handle your RRSP contribution room is to utilize the amount only to the extent that helps reduce the adequate tax load.
Choosing the smarter way to utilize your unused RRSP contribution limit
While utilizing the RRSP room in the later years of your career makes sense, you could be missing the best investment opportunities during your early years. You may be at the risk of missing out on the opportunity to utilize the power of compounding! Where your investments keep growing sheerly due to the fact that they had more time to compound before your retirement. And it helps you build a healthy habit of investing and saving regularly, giving your funds more time to grow and multiply.
The best way to avoid unwanted tax implications is to know the rules before contributing to your RRSPs. In case you are unsure about the rules, it is always better to consult a professional and ensure that your retirement savings are being invested in the most beneficial way. Budgeting is essential for anyone who wants to live a life of financial stability. It makes complete sense to know how much you are earning and how much you are spending. You could use a professional tax service to help you track your budget and stay on top of your finances.
Can an RRSP be problematic for US citizens?
They can be, but not always. Changes to the US tax code in 2020 did make things easier for US citizens with RRSPs. Ideally, get advice from a US tax professional before getting started with an RRSP. If you already have an RRSP, have them check your statements.
