Page 72 - A Canuck's Guide to Financial Literacy 2020

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Registered Retirement Savings Plan

RRSPs or also known as a Registered Retirement Savings Plan were introduced in 1957 to
help Canadians save for a comfortable retirement. RRSPs are an investment vehicle
registered with the Canadian government which allow you to defer paying tax on money
deposited into it. When you contribute into an RRSP, you get a tax deduction for the amount
contributed which reduces your taxable income for the year. The greater your tax rate, the
greater your tax savings. For example, if you contribute $5,000 into your RRSP, your
income will be lowered by $5,000 and thus resulting in tax savings to you.

Contributing into an RRSP

Anyone who has "earned income" such as employment earnings can contribute to an RRSP
- up until December 31st of the year they turn 71. Earned income may also include self-
employment income, CPP/QPP disability payments, and net rental income. Keep in mind
that there are limits of how much you can contribute each year to your RRSP.

RRSP Maximum Contribution Limits

The allowable RRSP contribution limit for the year is the lower of:

o 18% of your earned income for the previous year, or
o the maximum contribution amount for the current tax year: $27,230 for 2020

Example: Jim is making a salary of $57,000 for 2019. For 2020, he has earned contribution
room of $10,260. ($57,000 x 0.18% = $10,260). If Jim has carry forward room, he may
contribute over this amount.

• Note: If you're a member of your company's pension plan such as Defined Benefit
Plan or Defined Contribution Plan, your pension adjustment will lower your RRSP
contribution room.
• Note: If you're part of a Deferred Profit Sharing Plan and contributing, your pension
adjustment will also lower your RRSP contribution room.
• Past Service Pension Adjustments (PSPA) and Pension Adjustment Reversals
(PAR) will also affect your contribution room. PAR may arise when a taxpayer
terminates their RPP or DPSP.