The Registered Retirement Savings Plan (RRSP) contribution deadline to receive a tax deduction on your 2023 income tax return is February 29, 2024. The RRSP allows individual taxpayers to deduct the amounts contributed. The earnings (interest, dividends, capital gains), accumulate in the plan free of current tax so that they grow more quickly than the taxable earnings of investment made by the taxpayer directly in a taxable account would. Thus there are two benefits to an RRSP: first the current tax savings resulting from the deduction of contributions, and second the accumulation of tax-free earnings on money while in the plan.
You can deduct RRSP contributions based on the sum of your current year contribution limit plus your carryforward contributions. The maximum amount that can be contributed to your 2023 RRSP is the lesser of (1) 18% of your earned income from the previous year (wages/salary and self-employment income) or (2) $30,780 plus your carryforward contributions. You can obtain your 2023 RRSP contribution limit on your 2022 Notice of Assessment or at My CRA. If you exceed the maximum contribution limit, the excess amount will be subject to a 1% per month penalty until you correct the excess contribution by withdrawing the excess amount.
Special provisions allow you to withdraw up to $35,000 from your RRSP for a home purchase (first time homebuyer) and up to $20,000 for higher education. Withdrawals must be made in compliance with the rules and repaid to the RRSP over a period of years.
In general, an RRSP is more attractive for physicians in higher tax brackets ($150,000 +), since you receive a greater benefit from deducting your RRSP against higher income. You may choose to defer the deduction and claim it in a future year. You would want to do this if you expect to be in a higher income tax bracket in the next few years. Your money in the RRSP would be set aside as savings and would be earning income on a tax-deferred basis, but the deduction could be claimed in a later year against a higher tax rate. This is a good option for new-in-practice physicians and residents/fellow that have used their TFSA contribution room but are expecting to earn a higher level of income in future years.
In deciding whether to contribute to your RRSP, you have to weigh the benefits of an immediate tax deduction for your RRSP contribution against the ultimate tax owing on the eventual withdrawal in retirement. This will depend, in part on the tax bracket you expect to be in when you retire, potential OAS subject to the OAS clawback. and reduction of other benefits as a result of income received in retirement. Your RRSP plan must be converted to a Registered Retirement Income Fund (“RRIF”) by the end of the year you turn 71. An RRIF require that you remove a set percentage of your assets every year starting with the year after they are deposited in your RRIF. You must begin to make the required minimum distribution in the year following the year you turn age 71. On death, undistributed amounts from an RRSP/RRIF are transferred to a spouse or included in income in the year of death.
Please get in contact with us at [email protected] for further details. Elliott Stone, CPA, CA, is the founder of MD Tax Physician Services in Toronto.