How do the RRSP contribution carry-forward rules work?
Presented By
Scotiabank
What are the rules about RRSP carry forwards? Should you ever defer deducting a contribution?
Presented By
Scotiabank
What are the rules about RRSP carry forwards? Should you ever defer deducting a contribution?
If I have $25,000 contribution room left in my RRSP, can I take that all at once plus my regular RRSP contribution of $31,560 for the tax year 2024? Effectively making a contribution of $56,560 to my RRSP?
— Lorraine
As soon as a taxpayer starts to earn income—like employment income, self-employment income, royalties, research grants or net rental income—they accumulate room to contribute to their registered retirement savings plan (RRSP). There are no age limits, so a teenager with a part-time job can start to build their RRSP room as long as they file a tax return to report their earned income.
Your RRSP room carries forward, meaning the amount is cumulative. So, 18% of your earned income for the previous year, up to the current year’s maximum contribution limit, becomes your RRSP room for the year. For 2024, the maximum is $31,560 for taxpayers with at least $175,333 of earned income in 2023. This gets added to any previously unused RRSP room from the past.
Interestingly, your 2024 RRSP room becomes available retroactive to January 1, 2024, upon filing your 2023 tax return.
If you are a pension plan member, whether it is a defined benefit (DB) or defined contribution (DC) pension, your T4 slip will include a pension adjustment (PA) that will calculate a reduction in your RRSP room for the following year. So, your 2023 pension enrollment reduces your 2024 RRSP room. This is done to ensure that a pension plan member does not have an unfair advantage to earn tax deferred retirement income over someone without a pension.
In your case, Lorraine, I want to caution you to make sure your understanding of your RRSP room is accurate. If your 2023 notice of assessment (NOA) says you have $25,000 of available contribution room for 2024, you probably do not have an additional $31,560 of RRSP room. If the NOA in question is for 2022 and shows your 2023 RRSP room, that may be reduced by any RRSP contributions you made in 2023 or by any potential pension enrollment. So, just be sure you are not double counting.
If in doubt, log in to the Canada Revenue Agency (CRA) My Account portal, or call the CRA at 1-800-959-8281 to confirm your 2024 RRSP room.
Interestingly, if you make your 2024 RRSP contribution in early 2024 based on your estimated new RRSP room, even though you cannot deduct it until next year, you may have to claim it on your 2023 tax return. This is because you claim RRSP contributions when made, even if they are not deducted until a future year.
Contributions made in the first 60 days of the year get reported on your previous year’s tax return. So, contributions made up to and including February 29, 2024, get reported on a 2023 tax return. You do not have to deduct an RRSP contribution either, even if you have sufficient room. Claiming the contribution was made and choosing to deduct that contribution are two different things.
A case in point may be your example, Lorraine, of contributing a large amount like $55,000 all in one year. If your income is $75,000, and you deduct $55,000 all in a single year, you would only have $20,000 of taxable income.
This seems good because you would owe very little tax and likely get a large tax refund. But the last dollar of deduction would only be saving you about 20% tax depending on your province or territory of residence. By carrying forward some of the contributions and deducting them the next year, you may save 30% tax, again, depending upon where you live. Delaying the deduction of the previous year’s contribution could save you 10% more tax the next year in the example. That equates to a 10% after-tax rate of return.
If you have a relatively high income, you may choose to deduct the whole amount in one year. But low-income contributors should beware contributing to their RRSP just to save tax. They may end up paying more tax on withdrawals than the tax they save on contributing.
Even if someone can contribute to their RRSP, it does not mean they should. Tax-free savings accounts (TFSAs) may be a better savings vehicle for someone in a low tax bracket. Although there is no tax savings on contributing to a TFSA, the future income and growth is tax free.
Read, “TFSA vs RRSP: How to decide between the two,” for an in-depth comparison of TFSAs and RRSPs (including factors like incomes, tax brackets, withdrawal horizons, group plans, first-time home buying, and more).
Taxpayers should always be careful about over-contributing to their RRSP. You are allowed to overcontribute by $2,000 without penalty, but any more than that can cause a 1% per month penalty tax. It is one reason to be careful about trying to estimate your RRSP room for the year and contribute before filing your tax return for the previous year. It is also a reason to read your NOA very carefully, as people often get confused about their RRSP room amount.
On your NOA, your RRSP deduction limit is the amount you can contribute to your RRSP but does not take into account adjustments like any previous RRSP contributions carried forward. Unused RRSP contributions are previous RRSP contributions that were not deducted in the past and are currently available to deduct. So, if someone has a $20,000 RRSP deduction limit, but $5,000 of unused RRSP contributions, their available contribution room is only $15,000.
Anyway, Lorraine, I hope this has been helpful. First, figure out your available contribution room by looking at your NOA or contacting CRA. Second, decide if you should be contributing to your RRSP and which investments to buy. Finally, if you make a large contribution, consider whether you should be deducting it all in one year.
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As a working senior can RRSP contributions be used to zero (able to earn 5K work income) to be eligible for full GIS guarenteed income supplement? I have a backlog of contribution room. Or should I wait til I’m not working so I can buy less RRSP’s. Want to take these same RRSP contributions out prior to age 72… as to avoid GIS clawbacks once actually retired.
Hi Diane, We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I just maxed out my RRSP contribution for 2023 in early February 2024. I will be paid out my bonus on February 23rd, 2024. Can I contribute a portion of that to my RRSP in February and just have it count towards my 2024 contribution limit without deducting it from my 2023 income? Or will that put me over my 2023 contribution limit even though it’s February 2024?
Thank you!
Regarding carry-forward, lets say I have $10K contribution room for 2023 Tax year, if I deposit $10K into RRSP account before Feb. 29th, 2024, later I found that I could only use $5K of that RRSP for my 2023 tax year, although my $10K started earning me return in RRSP account, can I still declare only $5K of that deposit to be considered as RRSP deposit for tax year 2023, and remaining $5K can be used in 2024 Tax year even though it is sitting in RRSP account?
I have plenty of room in my RRSP deduction limit as noted on Notice of Assessment for 2022. I have not contributed to RRSPs since 2017 or 2018. What happens in this scenario if I contributed 100,000 to rrsps as of Dec, 2023 and my income is low earnings part time for 2023. How much can I claim in rrsps and what do I do to claim some of that contribution in future years. Can I transfer some to my husband to reduce taxable income?
Hi
I have been working and filing my taxes for 20 years, but only started contributing to my RRSP for the last 10 years, and maxing out the RRSP contributions for the last 5 years. Does my RRSP contribution room from the 10 years I did not contribute be carried forward? Because I do not see this on my tax return contribution room
Thank you
Hi, I think that this statement is inaccurate:
Contributions made in the first 60 days of the year get reported on your previous year’s tax return. So, contributions made up to and including February 29, 2024, get reported on a 2023 tax return. You do not have to deduct an RRSP contribution either, even if you have sufficient room. Claiming the contribution was made and choosing to deduct that contribution are two different things.
It should be “can be reported” since you can report them in the previous year or the current year’s taxes.
I had $6,000 room in my RRSP and in January contributed that as well as more knowing full well that I had more room based on the previous years income. Am I subject to an over contribution penalty? I just thought I could contribute towards my 2024 RRSP when 2024 commenced. Or is it 01 March? If so then will my over contribution situation cease on March 1st?