As you’re planning for retirement, a registered retirement savings plan (RRSP) can be a great way to boost your savings. These accounts, which are available to all Canadians, offer special benefits — you can deduct your annual contribution from your salary at tax time, which reduces the amount you pay in income taxes.
How to Calculate Your RRSP Contribution Limit
Each year, the government sets a limit on how much you can contribute tax-free to your RRSP. To calculate your contribution limit for a given tax year without an RRSP contribution calculator, complete the following steps:
- Confirm that the current RRSP contribution deadline has not passed. For the 2018 tax year, the deadline is March 1, 2019.
- List your total earned income for the year.
- Multiply your total earned income by 18% (or 0.18).
Your total contribution is allowed to be either the value calculated in step 3 or $26,230, whichever one is lower. For example, imagine that your total earned income in 2018 is $165,000. To calculate your RRSP contribution, multiply $165,000 by 0.18 to get $29,700. Since this is higher than the $26,230 2018 RRSP contribution limit, you can only contribute $26,230 tax-free.
On the other hand, if your total earned income is $65,000, your 18% limit equals $11,700. Since this is less than the RRSP contribution limit, you’re able to contribute the full amount.
By maxing out your tax-free RRSP contribution each year, you can reduce your income taxes and improve your finances for retirement. If you need help with financial management, online accounting software can help. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.