RRSP explained: contribution room, deadline & how it works

The RRSP is Canada's foundational retirement savings account. Most people know it exists — far fewer understand exactly how the room calculates, why the deadline matters, and what it actually costs to withdraw early.

How contribution room works

Every year, CRA calculates how much you can contribute based on your prior year's earned income. The formula is:

New room = 18% × prior year earned income, up to the CRA's annual dollar maximum.

Earned income includes employment income, self-employment income, rental income, and certain other amounts — but not investment income. Your exact room is on your Notice of Assessment or inside your My CRA Account. Always check CRA's website for the current year's dollar cap, as it changes year to year.

Unused room carries forward indefinitely

Any RRSP room you don't use in a given year rolls forward. If you've never contributed, you may have accumulated room going back years — sometimes tens of thousands of dollars. This is particularly valuable when income spikes (a bonus year, selling a business, etc.) — you can make a large lump-sum contribution to shelter a windfall.

Pension adjustments

If you're a member of a workplace defined-benefit or defined-contribution pension plan, your new RRSP room is reduced by a "pension adjustment" to account for the retirement benefit you're already building through work. Your T4 slip shows this amount each year.

The contribution deadline

This is one of the most misunderstood parts of the RRSP. The deadline isn't December 31 — it's the first 60 days of the following calendar year, which usually falls on or around the last day of February (or early March in a leap year).

Contributions made between January 1 and Day 60 can be applied to either the previous tax year or the current tax year — your choice. This is why you see RRSP contribution deadline ads in January and February. After Day 60, contributions can only apply to the current tax year.

Check CRA for the exact deadline date each year. Missing it by one day means waiting a full year to claim the deduction on that year's return.

The tax refund mechanic

Every dollar you put into your RRSP reduces your taxable income for the year by the same amount. At tax time, that translates into a refund (or reduced tax owing) based on your marginal tax rate.

Example: if your marginal rate is 33% and you contribute $6,000, you'll receive roughly $2,000 back. That's not "free money" — it's money you've deferred paying tax on. When you withdraw in retirement, it will be taxed then. The bet is that your retirement tax rate will be lower than your working-years tax rate.

Many financial advisors suggest investing the refund itself — either back into the RRSP or into your TFSA — rather than spending it. This significantly amplifies the long-term benefit.

Withdrawals: what happens when you take money out

Unlike a TFSA, withdrawing from an RRSP is not free. When you take money out:

• The withdrawal is added to your income for that year and taxed at your marginal rate
• Your financial institution withholds tax at source (10% on amounts up to $5,000; 20% up to $15,000; 30% above — confirm current rates with CRA)
• The contribution room is permanently lost — it does not come back the following year (unlike a TFSA)

Early withdrawals are generally a bad idea for this reason. The two main exceptions are the Home Buyers' Plan and the Lifelong Learning Plan.

Home Buyers' Plan (HBP)

First-time home buyers can withdraw up to $35,000 from their RRSP under the Home Buyers' Plan — and not pay tax on it at withdrawal, as long as they repay it over 15 years. Couples can each use the HBP for up to $70,000 combined from their respective RRSPs.

The catch: repayment starts two years after the year of withdrawal. If you don't make the annual repayment, that year's required amount is added to your taxable income. It's borrowed room, not free room.

The HBP can be stacked with the FHSA for the same home purchase — the FHSA has no repayment requirement, making the combination powerful for first-time buyers.

Lifelong Learning Plan (LLP)

The LLP lets you withdraw from your RRSP to fund full-time education or training for yourself or your spouse — up to $10,000 per year, $20,000 total. Like the HBP, withdrawals must be repaid over time (over 10 years), or the unpaid balance is taxed as income. Confirm current LLP limits and rules with CRA.

What happens to your RRSP at age 71

You must collapse your RRSP by December 31 of the year you turn 71. Options include:

• Convert to a RRIF (most common) — a Registered Retirement Income Fund requires minimum annual withdrawals, which are taxed as income
• Purchase an annuity — provides guaranteed income for life
• Cash it out — the full balance becomes taxable income in one year, which usually results in a very large tax bill

Most Canadians convert to a RRIF. The minimum withdrawal amounts increase as you age — plan for this with a financial advisor.