RRSP Contributions and Saving for Retirement

December 11, 2024

As the year comes to an end, many people wonder if they have set aside enough money for retirement and have questions about how much to contribute to their Registered Retirement Savings Plan (RRSP). The answers to these questions will be different for each person and consider factors such as employment income and taxation rates while working vs while in retirement, personal retirement lifestyle goals and income needed to pay for these goals, and immediate financial priorities. Here are some tips to help plan your RRSP contribution and maximize the tax advantages.

How much can be contributed to an RRSP?

There is a limit to the amount that can be contributed into an RRSP. Each year this amount is calculated based on earned income along with CRA’s annual limit. Here is how to calculate your personalized RRSP contribution limit.

Unused RRSP deduction limit at the end of the previous year, plus the lesser of 18% of your previous year’s earned income or the CRA limit of $31,560 for 2024 minus any Pension Adjustment (PA).

Your RRSP contribution limit can be confirmed through Canada Revenue Agency’s (CRA’s) myaccount.ca or through your Notice of Assessment (NOA) which is sent out by CRA yearly after you file your tax return.

What if excess contributions are made?

If there is a miscalculation, CRA allows for a lifetime excess contribution of $2,000.00 without penalty. Beyond this CRA charges a tax of 1% monthly until the excess is removed.

What is a Pension Adjustment (PA)?

A PA is the value of the benefits earned under your employer’s Registered Pension Plan (RPP) and Deferred Profit Sharing Plan (DPSP) which generally reduces your RRSP deduction limit for the year. Registered Pension Plans (RPP) are designed to help with financial security into retirement. This is accomplished by providing either a monthly income stream through a Defined Benefit Plan or by accumulating a monetary pool of funds through employee contributions with the employer matching a percentage of the contribution into a Defined Contribution Plan. If your employer provides a Defined Benefit, CRA will estimate the value of the benefit you earned throughout the previous year. If your employer provides a Defined Contribution or Deferred Profit Sharing then the PA is the total of what you and your employer contribute throughout the previous year.

Considerations before contributing to an RRSP

Saving for your retirement will create greater opportunity to maintain your desired lifestyle in your later years. Ask yourself what you would like to do in retirement and what will make retirement fulfilling. There will be a cost associated with funding these retirement plans. Putting a dollar value to these goals and working backwards to understand how much savings must be accumulated and the monthly income needed to fund these aspirations will be helpful when assessing how much to contribute.

While working, prioritize your financial goals. At times you may determine it is more important to pay down debt, build emergency savings or save for a mid-term goal such as the down payment for a home.

Can an RRSP be over-utilized?

Understanding how much retirement income you will be receiving is critical when contemplating how much to contribute into your RRSP. Retirement income could be received from various sources including Canada Pension Plan (CPP), Old Age Security (OAS) and Retirement Pension Plans (RPP). RRSPs must be converted into a Retirement Income Fund (RIF) by age 71 with all withdrawals added to your taxable income.

While employed, many people contribute the maximum amount possible into their RRSP to reduce their taxable income to produce tax relief. While this could be an effective strategy while working, it may create additional tax burden into retirement. Understand your income levels and marginal tax rates (MTR) while employed and during retirement. If you have greater income and are in a higher MTR while working vs being in retirement, RRSP contributions may be beneficial. Contributing while in a higher MTR will provide greater tax breaks on income compared to withdrawing the monies from your RRSP in retirement and paying income tax while in a lower MTR. However, the reverse has been known to happen where an individual could have greater income and be in a higher MTR while in retirement vs during employment.

Should you determine that saving long term within an RRSP is not the most advantageous investment account, other strategies can be used as an alternative or to complement the use of an RRSP such as a Tax-Free Savings Account (TFSA).

Deferring an RRSP contribution.

At times it may be beneficial to defer using all your RRSP contribution as a tax deduction in the year the contribution was made. Any contributions you do not deduct in the calendar year made will become ‘unused contributions’ and can be carried forward into the following years. You will have the option to use them in following tax years. The unused contribution will have to be reported on Schedule 7, RRSP, PRPP and SPP Contributions and transfers and HBP and LLP Activities. This may be advantageous if you are expecting to have an increase in future earnings which will bring you into a higher MTR. This will maximize tax savings. While the funds are in the RRSP the growth will remain tax-deferred.

How to make an RRSP contribution?

There are two ways to make RRSP contributions. One option is as a continuous savings strategy which are regular contributions throughout the year. Many people set up their RRSP contribution to be an automatic withdrawal from their bank account as soon as their pay is credited. This will ensure retirement savings are being made. If you receive an increase in earnings adjust the contribution to stay on track with your retirement savings goals. The other option is to make an annual lump sum contribution. Many individuals ‘top up’ their regular contributions with a lump sum. Starting early in life with regular contributions can add up to sizable savings with long term growth compounding through interest earned and market growth.

Setting aside money into a Registered Retirement Savings Plan (RRSP) is a great way to save for your future. There are many benefits to an RRSP including the contributions being deductible from earned income which reduces tax liability. While the funds are invested within the RRSP the income earned remains tax-deferred until withdrawn. Upon retiring, the RRSP is converted into a (RIF) with the withdrawals becoming taxable income. Speak to your financial advisor to create a customized retirement plan for you.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

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