Early in the year, Canadians hoping to take advantage of the tax benefits of RRSP are usually in a rush to beat the RRSP contribution deadline.
Registered Retirement Savings Plan (RRSP) is a great retirement savings tool. Your contributions are tax-deductible; meaning they’ll reduce your taxes, and grow tax-free until you start making withdrawals.
By contributing to an RRSP when you’re in a higher tax bracket than when you start making withdrawals at retirement, you’ll end up paying less taxes overall.
In this post, you’ll learn about the RRSP deadline rules, deadline for RRSP contribution for 2020 tax year, the RRSP contribution limit for 2020 and 2021 and much more.
If you’re ready, let’s start
RRSP Contribution Deadline Rules
The first thing to know about RRSP deadline is this:
RRSP contribution year is not a calendar year that starts in January and ends on Dec 31st like the tax year for your personal income returns.
You have until the 60th day of a year to contribute to your RRSP if you want the contribution to count towards the tax returns of the previous year.
For example, you can still deduct contributions you made to your RRSP until the 60th day of 2021 from your 2020 tax returns.
When the 60th day falls on a weekend, the RRSP deadline will be the next business day.
Depending on your financial institution and when you contribute, you may receive 2 tax receipts for your RRSP contributions.
The first one will cover the contributions you made between the start of the contribution year and Dec 31st. While the second one reflects the contributions made from January 1st to the RRSP deadline.
Check this post to learn more about RRSP contribution year.
RRSP Contribution Deadline 2020
The RRSP deadline for 2020 is March 1, 2021. That is, the last day to contribute to your RRSP to claim the RRSP deduction in your 2020 tax returns is March 1, 2021.
Any contribution made to an RRSP after this date will count towards the 2021 contribution year that starts on March 2, 2021 and ends on March 1, 2022.
To clarify: contributions made within the first 60 days of each calendar year, starting January 1st , count towards the previous year and not the current year.
Take note of this to avoid exceeding your contribution limit.
What if I missed the RRSP deadline?
So what happens if you missed the RRSP deadline? Well, you missed out on the tax deduction and tax-free growth of your money for that year.
The good news is:
You don’t lose your available contribution room. You can carry it forward and catch up with the contribution in future years.
RRSP contributions are allowed up to December 31st of the year you turn 71. After age 71, you’ll have to convert your plan into a Registered Retirement Income Fund (RRIF) and start making minimum withdrawals.
If you can, it’s a good idea to always maximize your contribution room before the deadline. You should create a plan to contribute all through the year to avoid the last-minute rush.
RRSP Contribution Limit Rules
The RRSP contribution limit rules are simple. The maximum amount you can contribute to your RRSP during the year is calculated as:
- 18% of the earned income for the previous year up to a maximum amount prescribed by CRA annually; plus
- Any contribution room carried forward from previous years; less
- Pension adjustments for those with a company pension plan
In other words, you accrue new contribution room every year based on your income from the previous year. That means, you need to have worked and earned some income to take advantage of the tax benefits of RRSP.
This contribution room will then be adjusted to include any carried forward room and contributions made to your pension plan.
Don’t confuse your RRSP contribution limit with your RRSP deduction limit.
Your contribution limit (or available contribution room) is how much you can contribute to your RRSP in a year.
On the other hand, the RRSP deduction limit is how much you can deduct from your total income to reduce your taxes for that year.
For most people, the 2 of them will be the same. But if you’ve made some contributions in previous years and deferred claiming the deduction, you’ll have unused RRSP contributions.
You can learn more about unused RRSP contributions here. Also, check this post for a detailed explanation of the difference between RRSP deduction limits and RRSP contribution limits.
RRSP Contribution Limit 2021
The contribution limit for the 2020 tax year is 18% of your 2019 earnings up to a cap of $27,230 plus any contribution room you carried over from previous years, minus any pension adjustments
For 2021, the maximum contribution room you can accrue for the year is capped at $27,830. Of course, you can contribute more than this if you didn’t maximize your contribution room from 2020.
To confirm your available contribution room for 2021, you can check your notice of assessment after you file your 2020 tax returns.
The RRSP Deduction Limit Statement has all the information about your RRSP deduction limit, unused RRSP contributions and available contribution room for 2021.
Don’t know the difference between the 3? Check the post linked below:
Related Post: RRSP Deduction Limit Vs Contribution Limit
You can also get the same information by logging into your CRA MyAccount. Once logged in, click on Mail and look for the last notice of assessment or notice of reassessment you received.
What if I exceed my RRSP contribution Limit?
Over-contributing to your RRSP comes with a stiff penalty of 1% per month on the excess contribution for each month the over-contribution remains.
But you’re allowed a $2,000 buffer before the penalty kicks in. This is enough to accommodate most genuine instances of over-contributions.
For example, if your contribution limit for 2020 was $10,000 but you contributed $15,000 to your RRSP accounts during the year. You have an excess amount of $5,000 but penalty is due on only $3,000.
But you won’t be allowed to deduct the full excess contribution of $5,000 from your tax returns for 2020.
The tax must be paid within 90 days after the calendar year to avoid paying additional late-filing penalties and interests.
You can check this post to learn how more about the penalty for exceeding your RRSP limit and how to deal with RRSP over-contributions.
If you’ve read this far, you should now understand how RRSP deadlines work and how much you can contribute to your RRSP.
Rather than wait till the deadline to contribute to your RRSP, you should start early.
Plan to contribute regularly even when you have little amounts to invest. Getting started with investing is now very accessible.
You don’t need to have thousands of dollars to start investing and build a low-cost diversified investment portfolio.
A TFSA is another registered account with tax-advantage. Though you won’t get a tax deduction for your contributions, your money will grow tax-free and will never be taxed even when you withdraw from it.
Check the posts below to learn more about TFSAs.