Registered Retirement Savings Plans (RRSPs) are set up by the government to encourage you to save for retirement.

But, there is a limit on the amount you can contribute to your RRSP each year. That limit is commonly referred to as your available contribution room.

RRSP contribution room is determined by several factors, including:

• Unused contribution room carried forward from the previous year.
• The lesser of 18% of previous year’s income and the current year RRSP dollar limit.
• Pension adjustments.
• Pension adjustment reversals.
• Amounts contributed but not yet deducted.

“Generally speaking, each year you can contribute the lesser of 18 per cent of your earned income from the previous year, or the maximum dollar limit as set by Canada Revenue Agency (CRA), which is $30,780 for 2023,” says Linda Lamarche, ATB Wealth Senior Financial Planning Specialist. “If you have a pension, your contribution room will be reduced to account for the pension benefits you accrued in the previous year, and if you have unused room from the previous year it is added to your current room."

Keep in mind that earned income is not the same as taxable income and generally refers to income from employment or self-employment, but also includes net rental income, taxable disability payments, taxable alimony payments, royalties, research grants, and income from supplemental unemployment benefit plans other than Employment Insurance (EI). It does not include Canadian Pension Plan retirement income, Old Age Security, retiring allowances, Deferred Profit Sharing Plans, death benefits, dividends, pension income, RSRP/RRIF or investment income.

You can find your available RRSP contribution room on your RRSP Deduction Limit Statement provided on your previous tax year’s Notice of Assessment provided by the CRA. This will give you an accurate calculation of the amount you are able to contribute this year. This information is also available by calling the CRA’s Tax Information Phone System (TIPS) at 1-800-267-6999 or accessing CRA’s online service.

RRSP withdrawals can make RRSP room disappear!

“When funds are withdrawn from an RRSP there is no ability to re-contribute. You’ve lost that contribution room forever,” says Lamarche. “This combined with the tax payable on the withdrawal serves as a deterrent for taking money out of RRSPs before retirement, resulting in a more stringent savings plan that is likely to stay in place and ensure you reach your goals.”

There are, however, some situations when assets in your RRSP can be used for purposes other than retirement and when your room will not be lost if you make a withdrawal. If you withdraw funds from your RRSP to participate in the CRA’s Home Buyers’ Plan or the Lifelong Learning Plan, you will be required to pay back the withdrawal to your RRSP according to each plan’s specific schedule, but will not lose your RRSP room. When participating in these programs, you will not be taxed on the money you withdraw, but you will not get a tax deduction for the money you repay back into your RRSP.

Take advantage of your RRSP room when it’s most effective

Since you will receive a tax deduction for your RRSP contribution, it is most beneficial to contribute to an RRSP when you are in a higher tax bracket so you can get greater relief on your tax bill. That said, if you have RRSP room and available money to invest, but a low income or no income to deduct it from, you should still contribute to your RRSP.

“Even though this money has been deposited into your RRSP, you can choose whether or not you are going to use it as a tax deduction when you file your income tax return or save it for another year. Each year you can decide how much of the money that has already been deposited will be deducted,” says Lamarche. “This allows for immediate deferred growth within the RRSP.”

Rather than making a large lump sum contribution into your RRSP come tax time, you should consider setting up Pre-Authorized Contributions (PACs) to your RRSP now. By setting up PACs to come out of your bank account bi-weekly, monthly or immediately after you receive a paycheque, you can avoid the rush before the RRSP deadline and benefit sooner from tax-deferred growth on those contributions. PACs also help develop good saving habits.

Questions about your retirement savings plan and how to best use your RRSP room? Get specialized advice and guidance from an experienced financial advisor by contacting us.