Registered Retirement Savings Plan Contribution (RRSP Contribution)

What Is a Registered Retirement Savings Plan Contribution?

Registered Retirement Savings Plan Contributions are assets invested in an RRSP. An RRSP is a retirement savings vehicle for employees and the self-employed in Canada. Such contributions can be made at any time and for any amount up to an individual's contribution limit for the year. If a contributor does not make the maximum allowable contribution, the balance of unused contribution room from 1991 onwards is carried forward indefinitely. This allows people to make up for the years that they did not maximize their allowed RRSP contributions.

Understanding Registered Retirement Savings Plan Contributions (RRSP Contribution)

An RRSP is an investment vehicle used to save for retirement in which pretax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. Registered Retirement Savings Plans have many features in common with 401(k) plans in the United States, but also some key differences. Because RRSP contributions can be made at any time, are tax-deductible, and can be made in cash or in-kind, they present a tremendous opportunity for reducing income taxes.

Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act. They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing, and what assets are allowed.

RRSP Contribution Limits

The RRSP contribution limit for 2019 is 18% of the earned income that was reported on an individual's 2018 tax return, up to a maximum of $26,500. According to the Canada Revenue Agency, that figure rises to $27,230 in 2020.

It's possible to contribute more, but you'll have to pay a 1% tax penalty per month on the contributions that exceed your RRSP deduction limit by more than $2,000.

Benefits of a Registered Retirement Savings Plan

Besides helping Canadians build their retirement nest egg, there are a few benefits to Registered Retirement Savings Plans.

Tax Advantages

RRSPs have two main tax advantages: Contributors may deduct contributions against their income. For example, if a contributor's tax rate is 40%, every $100 they invest in an RRSP will save that person $40 in taxes, up to their contribution limit. And the growth of RRSP investments is tax-sheltered. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. As a result, investments under RRSPs compound at a pretax rate.

In effect, RRSP contributors delay the payment of taxes until retirement, when their marginal tax rate will be lower than during their working years. The Government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which is designed to reduce the population's reliance on the Canadian Pension Plan to fund retirement.

Distributions or Withdrawals

An RRSP account holder may withdraw money or investments at any age. Any sum is included as taxable income in the year of the withdrawal unless the money is used to buy or build a home or for education (with some conditions).