RRSP Deadlines, Contribution Limits & Tips to Know in 2023
If you have an RRSP, it’s not enough to just contribute regularly. If you fall into one of the higher tax brackets; it’s also wise to top off your contribution limits before the deadlines to maximize your tax credit. February 28, 2023 is the RRSP contribution deadline for this coming tax year.
Let us help you determine what best course of action to take given your specific income tax bracket and available contribution room.
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What is a RRSP?
RRSP (Registered Retirement Savings Plan) is a Canadian tax-deferred plan intended for retirement savings. RRSP contributions are tax-deductible, meaning they can be used to reduce your taxable income and may even result in a tax refund. The money in your RRSP can grow and earn compound interest.
When you withdraw money from your RRSP, the withdrawal amount is considered taxable income. However, there are some exceptions to this rule like the Home Buyer’s Plan and Lifelong Learning plan, which allows you to borrow money from your RRSP interest-free for specific purposes- without being taxed which we will discuss more later in this post.
To help you prepare for the upcoming tax season, here’s a quick look at the key dates and deadlines.
What’s the 2022 RRSP contribution deadline?
March 1 to December 31, 2022
January 1 to February 28, 2023
This follows the “first 60 days rule,” meaning that any RRSP contributions made in the first 60 days of the year must be claimed on the tax return for the previous year.
What happens if you miss the RRSP deadline?
If you miss the deadline or don’t reach your RRSP contribution limit for 2022, the unused portions of your contribution room roll forward indefinitely, year-over-year, increasing your RRSP deduction limit on your taxes.
RRSP contribution limit
Aside from the RRSP deadline, there is also an RRSP contribution limit that you need to be aware of. Your RRSP contribution limit is 18% of the total income you earned in the previous year, up to a specific limit set by the CRA whichever is the lower of the two options.
If you go over your contribution limit, you will have to pay a penalty of 1% per month. That said, the CRA does give you a grace amount of $2,000 if you accidentally over-contribute. You can also find information on any unused contribution room online on your CRA account or you can also call 1-800-267-6999.
RRSP tax deduction
As mentioned above, your RRSP is a tax-deductible account so when you contribute to your RRSP it can help reduce your tax. For example, let’s say you made $40,000 this year and you contributed $5,000 to your RRSP. Your contribution would lower your taxable income to $35,000 for the year.
Now keep in mind that an RRSP is not tax-free like your TFSA. You do have to pay tax eventually however, any income earned will remain tax-free until it comes time to withdraw the money. You will likely be retired at this time and have a reduced income level so even though you will be taxed, your tax rates shouldn’t be too high.
As mentioned earlier, you will be penalized if you withdraw early from your RRSP except for in specific circumstances below.
Using your RRSP for the Home Buyer’s Plan (HBP)
The Home Buyer’s Plan is a government program that allows you to withdraw from your RRSP to buy or build a qualifying home for either yourself or a related person with a disability. To qualify, you must meet the following requirements:
You must be a first-time home buyer
You must have a written agreement to buy or build a qualifying home for yourself or a related person with a disability
You must be a resident of Canada
The qualifying home must be used as a principal residence for yourself or a related person with a disability and the home must be occupied within 1 year after buying or building.
If you meet the program requirements, you can withdraw up to $35,000 from your RRSP for the down payment, tax-free. And if you are purchasing with someone else, it allows a total of $70,000 towards the down payment on the home.
However, the HBP is considered a loan and must be paid back to your RRSP within 15 years. If you don’t repay it, the amount is taxable and you will lose the RRSP contribution room permanently.
Using your RRSP for the Lifelong Learning Plan (LLP)
The Lifelong Learning Plan is a government program that allows you to temporarily withdraw up to $10,000 per year ($20,000 total) from your RRSP to pay for full-time education or training for either yourself or a spouse/ common-law partner. However, it cannot be used for your children. It is similar to the Home Buyers’ Plan in that the money does have to be repaid back into your RRSP except you have 10 years to pay back the funds.
RRSP Key Take-Away
An RRSP is a smart investment & retirement tool that you should consider using to help save for your future. Just make sure to take the time to understand how it works because there are a lot of rules to be mindful of such as the RRSP deadlines, contribution limits and more.
Our EO CPA team will be here to guide you, make sure to get you ready every tax season and make saving for retirement a breeze for you.
Please feel free to contact us if you have any questions we would be more than happy to help!
Disclaimer: This article is for informational purposes and not intended as accounting or tax advice. Please contact us for an engagement to best assess your specific situation.
