The deadline for RRSP contributions that can be applied to your 2022 taxes is March 1, 2023. But do you need to scramble to make a big contribution by this deadline? The answer depends on a few factors, like total income, tax bracket and remaining contribution room.
What are RRSP contributions?
A registered retirement savings plan, or RRSP, is a tax-deferred plan intended for retirement savings. RRSP contributions are tax-deductible, which means they can be used to reduce your taxable income and may even result in a tax refund. The money in your RRSP can grow and earn compound interest on a tax-free basis.
When you withdraw money from your RRSP (ideally in retirement), the withdrawal amount is considered taxable income. However, some exceptions to this rule, like the Home Buyers’ Plan and Lifelong Learning plan, may allow you to borrow money from your RRSP interest-free for specific purposes — without being taxed.
What’s the 2022 RRSP contribution deadline?
While the tax year for 2022 income and tax deductions lines up with the calendar year (January 1 to December 31), the tax year for purposes of an RRSP contribution follows a different schedule:
- March 2 to December 31, 2022
- January 1 to March 1, 2023
This lopsided schedule is also sometimes called the “first 60 days rule,” meaning that any RRSP contributions made in the first 60 days of the year must be claimed on the tax return for the previous year.
How the RRSP deadline impacts your taxes
You will receive two separate receipts for your RRSP contributions: one for contributions made between March 2 and December 31, 2022, and another for contributions between January 1 and March 1, 2023. You must claim both amounts on your 2022 income tax return. So if you make an RRSP contribution in the first 60 days of 2023, wait to file your taxes until you receive the second tax slip.
Even though you have to record RRSP contributions made during the first 60 days of 2023 on your 2022 taxes, you don’t have to apply them as a tax deduction. Instead, you can elect to carry the amount forward to your 2023 tax return — or another future year.
In fact, this “carry forward” option applies to all RRSP contributions regardless of when they’re made. You must declare these contributions on your taxes in the year you make them, but you don’t have to use them as deductions for that year. They will appear as “unused RRSP contributions” on your notice of assessment, and you can apply that amount as a tax deduction in any future tax year.
You might consider carrying forward unused contributions if you anticipate being in a higher tax bracket in the future and are interested in lowering your taxable income.
Should you make an RRSP contribution before the deadline?
Before deciding whether to make a one-time or additional contribution before the RRSP deadline, check your notice of assessment or your CRA My Account to see whether you have any remaining contribution room for 2022. Exceeding your RRSP limit may result in tax penalties.
Generally speaking, the higher the tax bracket you’re in, the more sense it makes to put money into an RRSP. The conventional wisdom behind RRSPs is that you’re in a higher tax bracket during your working years than you will be in retirement. Contributing to an RRSP while you’re in a higher tax bracket allows you to take advantage of the deductions that reduce your taxable income. When you withdraw money from your RRSP in retirement, when it’s assumed you’ll be in a lower tax bracket, the funds will be taxed at a lower rate.
However, not everyone falls into a high tax bracket during their working years. If you’re in a lower tax bracket, the benefit of deducting your RRSP contributions could be minimal. Plus, your taxable RRSP withdrawals in retirement could take you above the qualifying thresholds for income-tested government retirement benefits like the guaranteed income supplement (GIS) and old age security (OAS), meaning you would need to repay those benefits.
In scenarios like this, contributing to a tax-free savings account, or TFSA, might make more sense. Although you won’t get a tax deduction for TFSA contributions, you won’t pay taxes on any growth or withdrawals — which means they won’t affect your government retirement income benefits.
And here’s where the major advantage of the “first 60 days” rule comes into play. With the calendar year behind you, you know what your total taxable income is for 2022. You can use that information to investigate your tax bracket and decide whether an additional RRSP contribution would be beneficial. Some people even use tax software to test different contribution amounts as they make their decision.
Take action early to avoid the RRSP deadline scramble
Some experts recommend waiting until the calendar year is over so you know your total income and tax burden and can use that information to decide how much money to contribute to your RRSP. Taking advantage of the “first 60 days” rule might be a good choice for people with less predictable income, such as those who are self-employed.
But if your income is predictable, and you receive a regular paycheque from an employer, consider saving yourself the hassle of scrambling to meet the RRSP deadline. Instead, set up automatic RRSP contributions throughout the year. This strategy is easier for budgeting, helps you take advantage of investment strategies like dollar cost averaging, and may even help you qualify for an employer match for your contributions.
An RRSP defers tax until you withdraw the funds. With a TFSA, you pay income tax first and won’t pay tax on the withdrawal. Both have their purpose.