track your contribution room - cra will help you with that
How to track your contribution room? You will find your RRSP contribution limits for the current year in Your CRA Account. You can call the CRA Tax Information Phone Service (TIPS) toll free.
The CRA allows a life-time RRSP over-contribution of $2,000(there is no such over-contribution allotment for the TFSA)
- One way to look at it is that it’s a buffer against mistakes as over-contributions (more than your cumulative limit allows you) have to be withdrawn. Otherwise the CRA will assess penalty tax (it can do so without contacting you first). But it can also cancel the penalty tax once the excess contribution and any interest gained on it is removed from the account (upon written request, where you explain why you over-contributed and how you resolved it, as well why you are asking for the waiver).
- If you realize you’ve overcontributed above $2,000, you must fill out a form to request a withdrawal (there should be no tax or you can recover the tax in your next return)
- If you are carefully monitoring your contribution limits, another way to look at it is that you can tax-shelter an additional $2,000 – so you should use this opportunity as soon as you are in a high tax bracket and have the extra funds.
how do you withdraw money from the rrsp?
You should not withdraw from your RRSP before you retire because you will lose that amount from the cumulative contribution limit. There are a few special cases where you can withdraw from your RRSP and later re-contribute the money, like to buy your first home or to fund education later in life). In some circumstances, you can also make a mortgage loan to yourself from your RRSP.
Once you take money out of the RRSP, it’s added to your income that year and taxed, unless you use the money for the Home Buyers’ Plan – first time buyer, up to $35,000, or the Lifelong Learning Plan – up to $20,000 over 4 years to take a full-time designated program (maximum $10,000 in any year).
- Under the Home Buyers’ Plan, you have to start repaying into your RRSP in the second year after the withdrawal year and you have 15 years to complete it.
- Lifelong Learning Plan requires you to repay the money over 10 years and you must start the repayment at the latest after 5 years.
you can contribute each year a portion of your income from last year
Each year you can put aside up to 18% of your prior year’s income (up to a maximum of $26,000, which is increasing with inflation – that maximum is now reached at an income around $150,000). The CRA determines how much you can contribute each year based on your tax return from the previous year. This is your contribution limit or room. This contribution room is for your individual RRSP as well as any company pension plan you may be paying into – so you need to carefully assess your situation.
In the year when you contribute to your RRSP, you don’t pay tax on the amount you’ve contributed – it’s a tax deduction.
You can accumulate the annual contribution room for future years if you don’t use it fully in any year.
You can make these tax-free contributions at any age but will likely do it in the future when you have enough spare income. Don’t feel pressured to deposit the entire 18% every year - you can contribute as much as you want in future years, assuming you don’t exceed your cumulative contribution room (difference between the sum of your annual limits and what you’ve already contributed).
It makes sense to make tax-free contributions when you are in a higher tax bracket (working at full speed) and make taxable withdrawals in a lower bracket (retired). To know how much you can contribute, you need to have filed your tax returns each year and keep track of your cumulative contribution limit (because you will pay penalties if you over-contribute).
March 1 is the deadline for contributions if you want to claim a deduction on your previous year tax return.