The article “How do the RRSP contribution carry forward rules work?” was originally published in MoneySense on March 10, 2023 . Photo by SHVETS production from Pexels.

What are the rules about RRSP carry forwards? Should you ever contribute the full amount?

“If I have $25,000 contribution room left in my RRSP, can I take that all at once plus my regular RRSP contribution of $30,780 for the tax year 2023? Effectively making a contribution of $55,780 to my RRSP?”  Lorraine

The rules around RRSP contribution room 

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 for 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.

How does 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 2023, the maximum is $30,780 for taxpayers with at least $171,000 of earned income in 2022. This gets added to any previously unused RRSP room from the past.

RRSP room becomes available retroactive to January 1, 2023, upon filing your 2022 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 year. So, your 2022 pension enrollment reduces your 2023 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.

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 2022 notice of assessment (NOA) says you have $25,000 of available contribution room for 2023, you probably do not have an additional $30,780 of RRSP room. If the NOA in question is for 2021 and shows your 2022 RRSP room, that may be reduced by any RRSP contributions you made in 2022 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 2023 RRSP room.

You have up until March 1, 2024, to contribute to your RRSP for the 2023 tax year. As stated above, when you file your 2022 tax return, you will get the 2023 RRSP room that becomes available back to Jan. 1, 2023.

Interestingly, if you make your 2023 RRSP contribution in early 2023 based on your estimated new RRSP room, even though you cannot deduct it until next year, you may have to claim it on your 2022 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 March 1, 2023, get reported on a 2022 tax return. You do not have to deduct a RRSP contribution either, even if you have sufficient room. Claiming 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. 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.

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 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).

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 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.

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 shares 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 NASDAQ exchange, qualify for RRSPs.

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.

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.