Where did my RRSP contribution room go?

September 20, 2011

You hear a lot about saving for retirement these days. Perhaps it’s a sign of the times, with baby boomers starting the first wave of the mass retirement that will sweep across Canada in the years to come. During the last few years before retirement, people start to take a much closer look at what they’ve got. The bits and pieces of pensions, former pensions from old jobs that became locked in accounts, RRSPs, spousal RRSPs, a few non-registered accounts, and the still relatively new Tax Free Savings Account for good measure.

Among the collection of accounts, having a pension plan is a beautiful thing. But as people approach their retirement, they may try to stuff as much money as possible into their RRSP. It makes sense to do it while their income is high, since their income will be lower when it is taken out during retirement. Plus they’ll get a tax refund, which can further their retirement plans by being used to purchase more investments. But when they decide to start this cash-stashing program, they may be surprise to find out that they have very little RRSP room left. They’ve become subject to the great equalizer known as the pension adjustment.

RRSPs and the Pension Adjustment
RRSPs allow all working individuals to defer paying tax on 18% of their earned income by earmarking it for retirement. Not every Canadian has a pension plan, and those who do know that they provide a great range of benefits, depending on the type of plan. This created the need for the pension adjustment. It was determined that it wouldn’t be fair for a person who had a pension plan to also be able to stock away an additional 18% of their income on a tax deferred basis. So, in the simplest of forms, the amount that you’re allowed to contribute to your RRSP gets reduced in accordance with the amount that has been attributed to your pension plan for retirement purposes. This is subject to an annual maximum that changes every year.

A Tax Free Solution
Having that gold plated pension plan is still a very, very good thing. But you should also take it to mean that a lot of your income will be taxable income during your retirement years. Those additional dollars that you’re looking to save can be put to good use through a Tax Free Savings Account. This strategy will give you greater access to your money without increasing your taxable income during retirement.

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