As part of our RRSP coverage, we are asking Clay Gillespie, a Vancouver-based certified financial planner and chartered investment manager, to answer selected reader questions.
Question: How do I know how much I can contribute to my RRSP? My income tax return last year gave me a maximum amount, based on my 2011 income, but my 2012 income was less. Can I still contribute the amount stated on the return? – Remona
Answer: Yes. Contribution limits to registered retirement savings plans are based on your previous year’s income. Thus, your 2012 RRSP contribution room was calculated using your 2011 net income, and includes any other unused RRSP contribution room since 1991.
If you wish to deduct your RRSP contribution during the 2012 tax year, then the maximum RRSP contribution room figure noted on your 2011 notice of assessment applies to that contribution. You will need to subtract any RRSP contributions you might have already made during the 2012 calendar year plus any “pension adjustment” – that is, contributions made by your employer on your behalf into an RRSP or company pension.
Okay, now let’s assume you expect your income to grow in years to come. If you are planning ahead and want to maximize the time your funds will grow tax deferred, you can actually make your RRSP contribution for 2013 today and then the maximum amount you can contribute is 18 per cent of your 2012 net income (to a maximum of $23,820), plus any unused RRSP contribution room from prior years. This number will also appear on your 2012 notice of assessment.
In other words, just because you make an RRSP contribution today does not mean that it must be deducted during the current tax year.
In many cases, it makes sense to make a contribution this year, but delay taking the tax deduction if you believe your income is going to be higher in a subsequent tax year. Always try to maximize your deduction by using it against income taxed at your highest marginal tax bracket.
Clay Gillespie is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial.