2021 RRSP Contributions
What you need to know about your RRSP contributions for your 2021 personal tax return.
If you have earned income like employment income and filed an income tax return in Canada, you are eligible to contribute to an RRSP until December 31 of the year you turn 71. RRSP’s are a type of financial account similar to a savings account or investment account but they have the added tax advantages if used strategically.
How much you can contribute to your RRSP is determined as 18% of earned income in the previous taxation year up to the maximum annual contribution limit each year. Below is a breakdown of the maximum RRSP contribution limit since 2015, keeping in mind that your own limit may vary each year depending on your earned income:
2015 – $24,930
2016 – $25,370
2017 – $26,010
2018 – $26,230
2019 – $26,500
2020 – $27,230
If you do not contribute your maximum each year, you can carry forward unused contributions and make additional contributions in future years. If you are unsure what your 2021 RRSP contribution limit may be, you can find it on your 2020 notice of assessment from CRA or contact our office for assistance. You have until March 1, 2022, to contribute to an RRSP in order to be eligible for an RRSP deduction on your 2021 personal tax return.
Funds contributed to an RRSP are deductible in the year they are contributed and only taxed when they are withdrawn. This means that if you contribute $1,000 to your RRSP in 2021, the $1,000 is a deduction from your total income, reducing your net income for tax purposes. This can be useful if you have higher income in a given year which results in paying taxes at a higher rate. By contributing to your RRSPs, you can reduce your net income, potentially saving in high rate tax and deferring the total tax to future years. The main benefit is realized when you later withdraw your RRPSs at a time when your income is lower. At that time, you are taxed on that withdrawal at a lower rate resulting in not only a tax deferral at the time of contributing but overall tax savings because you are later taxed on those funds at a lower rate. When withdrawing your RRSPs at a later date, withholding tax must be held back by your RRSP provider and sent to CRA at the following rates:
Up to and including $5,000 – 10%
$5,000 to $15,000 – 20%
More than $15,000 – 30%
You will receive a slip (T4RSP) for the withdrawal and the amount must be reported on your personal tax return.
If you contribute more to your RRSP than your RRSP contribution limit you will have an excess contribution which is taxed at 1% per month if it exceeds your contribution limit by more than $2,000. If you exceed your contribution limit for the year you have 3 options:
- Withdraw the overcontribution. You can complete for T3012A to remove the over-contribution without upfront withholding tax. Penalties on over contributed amounts may still apply.
- Complete a Schedule 7. Designate the amount of contribution you want to carry forward to a subsequent tax year. This amount will be reported on your Notice of Assessment and will reduce your contribution room for the next tax year.
- Complete Schedule 7 if you have participated in the Homebuyers’ Plan or the Life Long Learning Plan and these contributions are a repayment.
For more information or advice on how you can take advantage of the potential savings with RRSPs, please contact our office.
