Whether you're just starting out in the work force, or well advanced in your retirement planning, it's in your best interest to stay up to date on one of Canada's best tax breaks - registered retirement savings plans or RRSPs.

A Registered Retirement Savings Plan (RRSP) is an account that one uses to help one save for one’s retirement. RRSPs help one defer their taxes while they save. Anyone who files a tax return can open an RRSP account until they turn 71, when Dec 31 of the year they turn 71 is the last day they can contribute to their own RRSP. For everybody else, who did not turn 71 in 2011, the deadline to make contributions eligible for deductions on their 2011 income tax is midnight February 29, 2012, but the sooner one makes their contribution, the better. All contributions into an RRSP grow tax-free enhancing the growth rate of your investments considerably.

The maximum RRSP contribution amount that can be deducted is called the "RRSP deduction limit". Your deduction limit is found on your Notice of Assessment from Canada Revenue Agency.  Your 2011 limit would be on your Notice that you should have received sometime in 2011 after you filed your 2010 tax return.  The deduction limit is calculated as:

¨     18% of "earned income" for the preceding year, to an annual maximum (see following table)

¨     less the "pension adjustment" amount, for participants in a Registered Pension Plan (RPP) or Deferred Profit Sharing Plan (DPSP)

¨     less any "past service pension adjustment", for participants in a RPP or DPSP

¨     plus any "past service pension adjustment" reversals

¨     plus unused deduction room carried forward from the previous year

The annual limits for RRSPs, money purchase (defined contribution) RPPs and defined benefit RPPs are:
 

Year	Annual Contribution Limits		Defined Benefit RPPs - Max Pension  Benefit per  Year of Service
	RRSPs	Money Purchase (MP) RPPs
2005	$16,500	$18,000	$2,000.00
2006	$18,000	$19,000	$2,111.11
2007	$19,000	$20,000	$2,222.22
2008	$20,000	$21,000	$2,333.33
2009	$21,000	$22,000	$2,444.44
2010	$22,000	$22,450	$2,494.44
2011	$22,450	$22,970	$2,552.22
2012	indexed	indexed	1/9 the MP limit

As simple examples, please see below
 

Deduction Limit Examples for RRSPs	Taxpayer 1	Taxpayer 2	Taxpayer 3
Earned income in 2008	$25,000	$45,000	$150,000
Deduction limit for 2009  = 18% of 2008 earned income, to maximum of $21,000	$4,500	$8,100	$21,000

The maximum of $21,000 for 2009 would be reached at an earned income amount of $116,667 in 2008.

A taxpayer can contribute up to the amount of their contribution limit, plus an excess contribution as long as the total excess contribution never exceeds $2,000.  Any excess contribution over $2,000 will be subject to penalties.  It is not mandatory to actually deduct the entire deduction limit amount on the current year tax return.  If the taxpayer will be in a higher tax bracket in the following year, some or all of the contribution made can be carried forward to be deducted in a future year.  The advantage of doing this must be weighed against the disadvantage of receiving the tax refund in a later year.

If the RRSP contribution is less than the deduction limit, then the "deduction room" is carried forward to future years.  Assume Taxpayer 3 made a contribution of only $10,000 for 2010.  The unused deduction "room" of $12,000 can be carried forward and added to the calculation of the 2011 deduction limit.

As you can see from the table above the contribution limit for 2011 is $22,450 plus any unused amount from previous years. This is laid out very clearly in your Notice of Assessment.

Please refer to the same to calculate your RRSP contribution room.

There are many investment vehicles eligible for RRSP contributions including savings account, GICs, stocks, bonds, mutual funds, segregated funds, mortgages and more.

For more information and clarification on how to determine your RRSP deductible room, please contact Lachman Balani of IDC Financial at 416-902-3580 or This email address is being protected from spambots. You need JavaScript enabled to view it.

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What is the maximum contribution limit for tax year 2011 if you have no unused room from previous years?

 

Answer next week.

More on RRSPs next week

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