Understanding your Registered Retirement Savings Plan (RRSP) is an important part of building a strong financial foundation for retirement. In this article, we’ll share five essential RRSP tips—plus one bonus strategy—to help you make the most of your contributions and tax advantages.

1. Know the Deadline

To apply an RRSP contribution to your previous year’s taxes, you must contribute by the RRSP deadline. For the 2020 tax year, that deadline was March 1, 2021. Deadlines vary slightly each year, but they generally fall on March 1 or 2. Try not to leave your contribution to the last minute—give yourself some breathing room by contributing a week or two in advance.

2. Understand Your Contribution Limit

Each year, your RRSP contribution room is calculated as 18% of your earned income, up to an annual maximum. In 2020, the maximum was $27,230. If 18% of your income exceeds the max, you're capped at that year's limit. Contribution room also includes unused amounts carried forward from previous years. You can find your available contribution room on your latest Notice of Assessment from the CRA.

3. Factor in Your Pension Plan

If you participate in a workplace pension plan—such as a defined benefit, defined contribution, or profit-sharing plan—your RRSP contribution limit will be reduced by what's called a pension adjustment. This ensures that your total retirement savings (RRSP + pension) remain within reasonable limits. You can find your pension adjustment on Box 52 of your T4 or Box 34 of your T4A.

4. Timing Your RRSP Deduction

Just because you contribute to an RRSP doesn't mean you have to claim the deduction right away. You can carry forward your RRSP deduction and use it in a future year when your income (and tax rate) may be higher. This strategy can help you maximize your tax savings over time. If you expect your income to rise significantly, it may be worth delaying the deduction. Talk to your financial planner or accountant to determine the best strategy.

5. Be Careful With Over-Contributions

The CRA allows a lifetime over-contribution buffer of $2,000 without penalty. If you go beyond that, you’ll face a penalty of 1% per month on the excess. In some cases, making a $2,000 over-contribution just before retirement can be a smart tax move. For example, a client retiring in 2021 was able to contribute $2,000 over the limit for 2020, generating an $800 tax refund—with no penalties. This strategy should be used carefully and ideally under professional guidance.

Bonus Tip: Reinvest Your Refund

RRSPs often generate tax refunds, especially if you're contributing while in a high tax bracket. Instead of spending that refund, consider reinvesting it into your RRSP or TFSA. For example, if you're 45 and reinvest a $2,000 refund each year until age 65, earning a modest 5% return, you could accumulate over $66,000. That could provide more than $8,500 per year for travel or other goals during your first decade of retirement.

RRSPs are one of the most effective tools Canadians can use to save for retirement while reducing their tax bill. Whether you’re contributing regularly or just getting started, these strategies can help you make the most of every dollar.

Need help optimizing your RRSP strategy? Connect with us at Parallel Wealth to create a personalized retirement plan that works for you.