How do the RRSP contribution carry-forward rules work?

How does an RRSP carry-forward work?

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 new RRSP room a taxpayer can earn is $31,560 for those with at least $175,333 of earned income in 2023. This gets added to any previously unused RRSP room from the past. For 2025, the maximum is $32,490, requiring income of $180,500 or more.

Interestingly, your RRSP room becomes available retroactive to January 1 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 2024 pension enrollment reduces your 2025 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. 

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Don’t double count, though

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 a pension adjustment. 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 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 that the contribution was made and choosing to deduct that contribution are two different things. 

Contributing a large amount to your RRSP

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. Sometimes, low-income taxpayers are better off forgoing RRSP contributions.

When a TFSA is better than an RRSP

Even if someone can contribute to their RRSP, it does not mean they should. Tax-free savings accounts (TFSAs) may be a better saving vehicle for someone in a low tax bracket. Although there are no tax savings on contributing to a TFSA, the future income and growth, as well as withdrawals, are 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).

Don’t overcontribute 

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 will result in a 1% per month penalty tax. It is one reason to be careful about trying to estimate your RRSP room for the year and contributing 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 the amount of their RRSP room. 

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. 

What can you hold in an RRSP?

• Cash: This includes cash and money-market mutual funds. Cash must be government-issued, so cryptocurrency is not eligible for RRSPs.
• Guaranteed investment certificates (GICs): GICs pay a guaranteed interest rate for a specified term. Longer terms usually offer higher rates.
• Mutual funds: A mutual fund holds a basket of assets, typically stocks or bonds, and investors buy units in the fund. Mutual funds can be actively or passively managed.
• Exchange-traded funds: ETFs track, or mimic, various stock indexes, and their units trade on stock exchanges. ETFs can be actively or passively managed.
• Bonds: A bond is a loan to a government or a corporation, in exchange for interest payments. Investors can buy individual bonds, bond mutual funds and bond ETFs.
• Stocks: Stocks that trade on a recognized stock exchange, such as the Toronto Stock Exchange or New York Stock Exchange, are qualified investments for RRSPs.

I hope this has been helpful, Lorraine. 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. 

Read more about GICs as a good investment:

• “Help! My RRSPs are all over the place”
• The benefits and flexibility of family RESPs
• How to ladder your GICs in Canada
• Is now the time for retirees to sell stocks and buy GICs?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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