How Much Can I Contribute to My RRSP?

A Registered Retirement Savings Plan (RRSP) is a tool for individuals in Canada to save for retirement. It functions as a savings vehicle where contributions can be deducted from taxable income, reducing immediate tax obligations. Earnings within an RRSP grow on a tax-deferred basis; taxes are paid upon withdrawal, usually in retirement when an individual is in a lower tax bracket. Understanding the limits and rules for contributing to an RRSP is important. This article guides you through determining your RRSP contribution limit and related considerations.

General RRSP Contribution Rules

The Canada Revenue Agency (CRA) sets annual RRSP contribution guidelines. Individuals can contribute up to 18% of their previous year’s earned income. This is subject to a maximum annual dollar limit. For instance, the maximum RRSP contribution limit for 2025 is $32,490, an increase from $31,560 in 2024.

Earned income for RRSP purposes includes salary, wages, bonuses, taxable benefits, net income from self-employment, and net rental income. Investment income, such as interest, dividends, and capital gains, does not qualify. These rules provide a baseline, but an individual’s limit can vary due to other factors.

Determining Your Personal RRSP Deduction Limit

The precise amount an individual can contribute to their RRSP is known as their “RRSP Deduction Limit” or “contribution room.” This personalized figure is the maximum amount that can be deducted from contributions made to personal or spousal RRSPs for a given year. The most accurate way to find this limit is by checking your latest Notice of Assessment (NOA) from the Canada Revenue Agency or by logging into your CRA My Account online. Your NOA provides a clear statement of your available RRSP deduction room for the upcoming tax year.

Several components influence the calculation of your personal RRSP deduction limit. It begins with any unused RRSP deduction room carried forward from previous years. To this, 18% of your earned income from the previous year is added, up to the annual maximum dollar limit. This amount is then adjusted by factors related to participation in employer-sponsored pension plans.

A “Pension Adjustment” (PA) reduces your RRSP contribution room. A PA represents the estimated value of the pension benefits you earned in a registered pension plan (RPP) or deferred profit sharing plan (DPSP) during a tax year. This value is reported on your T4 tax information slip in Box 52 and aims to equalize tax-assisted retirement savings opportunities between individuals with and without employer pension plans.

Another adjustment is the “Past Service Pension Adjustment” (PSPA). A PSPA arises when an individual is credited with additional pensionable service for past years or when their pension plan is retroactively improved. Like a PA, a PSPA reduces your available RRSP contribution room to ensure that the overall 18% limit on tax-assisted retirement savings is maintained. This adjustment accounts for the increased pension benefits accrued for prior periods.

Conversely, a “Pension Adjustment Reversal” (PAR) can increase an individual’s RRSP contribution room. A PAR typically occurs when an individual leaves a registered pension plan or deferred profit sharing plan and the value of the benefits received is less than the total pension adjustments reported over the years. This adjustment restores RRSP contribution room, making the retirement savings system more equitable for those who change jobs. These adjustments ensure that the total tax-sheltered savings across all registered plans remain balanced.

Spousal RRSP Contributions

A spousal RRSP allows one spouse or common-law partner to contribute to an RRSP in the other’s name. This strategy is used for income splitting in retirement, potentially reducing the couple’s overall tax burden. The contributor, usually the higher-income earner, receives the tax deduction. The funds legally belong to the annuitant spouse, who controls investment decisions and withdrawals.

Contributions to a spousal RRSP use the contributor’s RRSP deduction limit, not the spouse’s. This means it does not create additional contribution room, but provides flexibility in using existing room. For example, if your contribution limit is $20,000, you can allocate that amount between your personal RRSP and a spousal RRSP in any combination.

The “three-year attribution rule” prevents immediate income splitting through quick withdrawals. If the annuitant spouse withdraws funds in the year of contribution or the two subsequent calendar years, the amount may be attributed back and taxed to the contributing spouse. After this three-year period, withdrawals are taxed to the annuitant spouse, potentially at a lower tax rate in retirement.

What Happens If You Over-Contribute

Over-contributing to your RRSP can lead to penalties from the Canada Revenue Agency. The CRA allows a $2,000 grace amount for over-contributions without penalty. This lifetime exemption accounts for minor errors. While permitted, this $2,000 cannot be deducted from your taxable income.

Contributions exceeding this $2,000 grace amount incur a penalty of 1% per month on the excess. This monthly tax continues as long as the over-contribution remains in the RRSP. For example, if you over-contribute by $5,000 (which is $3,000 above the $2,000 buffer), you would pay 1% on $3,000 each month.

If you over-contribute, address it promptly by withdrawing the excess amount. Use Form T1-OVP, Individual Tax Return for RRSP, PRPP, and SPP Excess Contributions, to report and calculate the tax owing. Submit this form and any payment to the CRA within 90 days after the end of the calendar year of the over-contribution to avoid further penalties and interest.