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The Difference Between Your RRSP Deduction Limit, and Your Contribution Limit

When it comes to saving for your retirement, everyone knows that the more you can, the better. But everyone also knows that while you’re trying to stow away as much cash as possible, when it comes to your RRSPs, there are limits. You can only contribute a certain amount every year, and you will be taxed on any money that goes over that limit. What trips many people up however, are the different limits that go along with RRSPs. And sometimes, they miss out on a bigger tax shelter, or end up having to pay those taxes and fines.

The Deduction Limit

Your deduction limit is 18 per cent of your income the year before. You will  be sent a Notice of Assessment every year from the Canada Revenue Agency, and this will contain your deduction limit in a dollar amount. That is the total amount of your income that you can claim for that year. However, that amount can be added to your contribution limit, which may or may not be different from your deduction limit.

The Contribution Limit

Many people think that their contribution limit is the amount shown on their Notice of Assessment, and it is – if you’ve made your full contribution in prior years. However, if you have unused contribution room from a certain number of years past, you might be able to add that to y our current deduction limit – making your total contribution even more, and your tax shelter even bigger.

So for instance, if your deduction limit for the 2012 tax year is $22,970 and you’ve made your full contributions for the past several years, that $22,970 will be all you can contribute. However, if you didn’t make any contribution at all for the 2011 tax year and still have $22,450 of unused contribution room left for that year, it may be able to be added to this year, giving you a total of $45,420 of contribution room for this year.

Contribution and deduction limits are just two elements of RRSPs that confuse many people when it comes to these types of savings vehicles, but they can be some of the most overwhelming. A professional retirement planner or financial advisor can help you figure out these limits, what yours are, and other strategies that you can employ to take the most advantage of your own RRSP.

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