What is a Registered Retirement Savings Plan Contribution?
Registered Retirement Savings Plan Contribution are assets invested in an RRSP. 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 a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax 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 information may be found here.
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 he or she invests in an RRSP will save that person $40 in taxes, up to his or her 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. This means that 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 will help the population rely less on the Canadian Pension Plan to fund retirement.
The RRSP contribution limit for 2018 is 18% of the earned income an individual has reported on their 2017 tax return, up to a maximum of $26,230. In 2019, that figure rises to $26,500. It is possible to contribute more but an additional sum over $2,000 will be hit with penalties.
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).