RRSP – Hidden Facts You Should Know
Most people contribute to their RRSP to save for retirement and to earn a tax refund but did you know these hidden facts concerning RRSP contributions:
If you have a registered retirement savings plan (RRSP) then you may not be aware of your contribution room (RRSP limit) and how the contributions you make affect your personal income tax return. There is a possibility that you may be contributing too little and not taking advantage of the entire limit, or you may be over contributing which could have tax implications.
To determine your RRSP contribution room, first calculate 18% of your earned income in the previous year to a RRSP limit the CRA has set for the current year, which can be found on the CRA’s website. This limit changes every year so you want to make sure you are on top of it. Your RRSP contributions room will then be calculated as the lesser of these two amounts you have compared, plus or minus any pension adjustments. Your contribution room carries forward and you have until February 28 to make your contributions and obtain the deduction for the prior year.
Under RRSP Contributions
Many people under contribute and don’t take advantage of have the opportunity to make a larger deduction on their personal income tax return. If you have the ability, you should contribute the maximum amount allowed to you so that you have the largest possible deduction allowing your taxes to be paid to decrease.
Conversely, you want to be really careful you’re not over contributing! What many people may not know is that over contributing can actually result in a 1% penalty per month on over contributed amount. The longer you are unaware of your over contributions (unused contributions) the longer the tax on that amount will accumulate. A tax penalty of 1% every month may seem very little, but over a few years it can really add up and you could end up paying thousands of dollars just for contributing in your own RRSP. You may only find out when CRA requests a T1 OVP.
If you have automatic payments to your Registered Retirement Savings Plan through your employer or bank account, you may never know that you have been over contributing until you receive a letter from the CRA demanding payment. You have to always be up to date regarding your limit so it’s always best to talk to your accountant, check your Notice of Assessment or CRA’s My Account service.
In a situation where you have been over contributed, you have two options. You can either withdraw all the excess money or transfer to another registered plan. We highly recommend withdrawing and transferring those funds to a TFSA. The TFSA lifetime limit as of 2018 is $57,500. Transferring to your TFSA could be a great option, however to get the best advice based on your situation and registered plans, talk to your accountant.
James Abbott, CPA and Associates