Mirador Real Advice Blog
RRSP Deduction Limits
February 20, 2024
We are often asked about RRSP deduction limits. Although the answer to this specific question can be very straightforward (we provide a link to the RRSP deduction limits set by the government later in this post), from a wealth planning perspective we seldom look at RRSP deduction limits in isolation.
Our long-term clients Art and Tammy Basker asked us if we would be willing to meet with their son Gordon and his wife Jennifer, as they felt the young couple could really benefit from the investment management and wealth advisory services that Mirador provides. In our initial meeting, Stan and I learned that Gord and Jenny had post-secondary education and were working successfully at their technology careers in Calgary. Gord and Jenny shared that they were making decent incomes and their main focus to-date had been to ensure they were taking advantage of the maximum RRSP deduction limits each year to save taxes and get their retirement nest egg established. After asking many more open-ended questions, we learned that while Gordon and Jennifer have healthy RRSP’s for their age due to maximizing their RRSP deduction limits each year, they didn’t have any other savings set aside. We also learned that they were planning to start a family once they felt more comfortable financially.
Stan and I talked to them about how real estate has played an important role in diversification and overall wealth building in many people’s lives, including our own. We shared with them our real estate strategies and experiences, especially how our home had provided a base of wonderful memories for our two teenagers that were close to leaving for their post-secondary education. We also talked to them about personal risk management and how it was a good practice to have an emergency fund established. We recommended that rather than maximizing their RRSP deduction limits each year, a balanced approach might make more sense for Gord and Jennifer at this time. We explained to them that there were additional savings vehicles and programs that are available to help them work towards all their goals and plans for their future.
We discussed the Home Buyers Plan (HBP), which is a program that allows participants to withdraw up to $35,000 from their RRSPs to buy or build a qualifying home. The amount withdrawn from the RRSP must be repaid pursuant to the terms of the HBP, but the repayments do not affect RRSP deduction limits, thus taking advantage of the HBP would not adversely impact Gord and Jenny’s goal of maximizing their RRSP deduction limits.
We introduced the Tax-Free First Home Savings Account (FHSA) to Gord and Jennifer, explaining that it is a new type of registered savings plan created in 2023 by the government to encourage Canadians to save for their first home. Because neither of them had ever owned a home before, they are eligible to open a FHSA which allows first time home buyers to contribute up to $8,000 each year to a maximum lifetime contribution of $40,000. If they purchase the home jointly then they could each open an FHSA thus benefiting from double the contributions. We pointed out that, similar to RRSPs the contributions to an FHSA are fully tax deductible and the income and gains inside an FHSA are not subject to tax. But the real benefit of an FHSA is that the withdrawals are not subject to any tax, making it a fantastic way to help them achieve their goal of owning their family home, particularly if they each open an FHSA. Lastly, any funds that are left over in the FHSA after making a qualifying withdrawal for their first home can be transferred to their respective RRSPs without reducing their RRSP deduction limits.
We also highlighted that Gord and Jenny could withdraw amounts from their RRSP under the HBP and make a qualifying withdrawal from FHSA for the same home so the HBP and FHSA worked very well together.
Although our discussions had been focused on Gord and Jennifer’s goal of maximizing their RRSP deduction limits and saving for their first home, as part of our initial meeting we felt we should discuss the importance of planning for the unexpected by having funds set aside for emergencies. What if one of them lost their job or worse, became severely ill, had an accident, and was unable to work? Although their employers had provided insurance plans, it was questionable whether the plans would adequately meet all their needs. An emergency fund, which we recommended be at least three months of living expenses, would help ensure they could pay the bills until they got back on their feet again. It is even more important once they’ve purchased their own home to help ensure they do not default on their mortgage. The Tax-Free Savings account (TFSA) is a preferred savings vehicle for an emergency fund in which you may need access to capital in the short term because the withdrawals are not subject to income tax, and unlike RRSP’s, the amount withdrawn is added back to your TFSA contribution room so that you can make additional contributions in future years. In addition, income earned within the TFSA is sheltered from tax.
Through Mirador’s holistic approach to investment management and wealth advisory services and in our quest to really get to understand the unique personal situation of each of our clients, we were able to identify that for Gord and Jennifer, rather than focusing solely on their RRSP deduction limits and tax reduction each year, at the present time, it was more prudent for each of them to first make the maximum contribution to the FHSA to help them save for their first home, then to their TFSA so that they are building up an emergency fund for unplanned scenarios. If they have remaining cashflow available, they can take advantage of the RRSP deduction limits. We reminded Gord and Jenny that it is important that this plan be revisited each time there was a significant change in their lives.
Gord and Jenny seemed concerned about giving up their RRSP progress. We told them about the carry forward provisions that would allow them to catch up on their RRSP contributions later, at a time when they would likely be in a higher tax bracket and receive even better benefits for their contributions.
I can happily say that after our meeting with Gord and Jennifer, they were thrilled with our recommendation of a balanced approach and agreed that it made much more sense for them at the current time rather than maximizing their RRSP deduction limits each year. They are now clients of Mirador and we have implemented this balanced approach to savings and they hold the Triopay program in each of their accounts.
For a quick reference on RRSP deduction limits, an RRSP deduction limit is the maximum amount of money that you can contribute to your RRSP each year and claim a corresponding deduction in your income tax return. It is calculated as the lesser of 18% of your previous year’s earned income and the annual RRSP deduction limit set by the government as summarized in this chart: MP, DB, RRSP, DPSP, ALDA, TFSA limits, YMPE and the YAMPE – Canada.ca. The annual TFSA contribution limits and room are summarized in this link: Contributions – Canada.ca
For more information on the HBP please click here: The Home Buyers’ Plan – Canada.ca and for more information on the FHSA please click this link: First Home Savings Account (FHSA) – Canada.ca
Do you still have questions now about your RRSP deduction limit and whether or not you should be contributing to your RRSP, FHSA or TFSA based on your financial planning and life goals? Mirador’s holistic approach to wealth advice and investment management puts us in an excellent position to identify possible planning opportunities around which retirement savings vehicles make the most sense for you, taking into consideration your unique situation, specific goals, and needs. We would be pleased to provide you with our unbiased, independent wealth advice for your unique personal situation. Feel free to respond to this email or call me at 403-978-6798.
Joyce Clarke, CPA, CA
Making Investors’ Lives Better