Should you hold onto unused RRSP contributions? – MoneySense

When you contribute to an RRSP, you must claim the contribution on your tax return for the year. That is, you report the fact that a contribution was made. You do not, however, have to deduct that contribution. You can choose to carry it forward to claim in a future tax year.

On your notice of assessment, there are three primary RRSP-related line items:

1. RRSP deduction limit
2. Unused RRSP contributions previously reported and available to deduct
3. Available contribution room

Your deduction limit means how much you can deduct for the year. Your unused contributions are previous RRSP deposits not yet deducted. These unused contributions reduce your available contribution room. So, if you have a $20,000 RRSP limit, but $5,000 of unused RRSP contributions from the past that you have not yet deducted, your available contribution room is only $15,000.

Your available contribution room is how much you can contribute to your RRSP today. You are allowed to overcontribute by up to $2,000, so there is a bit of a buffer. However, if you exceed that $2,000, you are subject to a penalty of 1% per month.

The $66,000 of unused RRSP contributions you have, Svetla, is pretty significant. It’s one of the larger carry-forwards I have come across. It represents tax deductions and potential refunds you have delayed.

Now, should you hold onto unused RRSP contributions?

You can carry forward your unused RRSP contributions indefinitely. They do not expire at age 71, when you would otherwise have to convert your RRSP to a registered retirement income fund (RRIF). It’s uncommon to carry unused RRSP contributions forward, but sometimes it makes sense, say when you’re going to have a much higher income year the following year. Your RRSP deduction may save you more tax if you save it for that subsequent year.

Svetla, it sounds like you are building up your unused RRSP contributions with the intention of using them to offset the tax on your future RRSP withdrawals. This may not be advantageous.

If you’re working and your income is higher now than when you retire, your RRSP deductions would save more tax today than in the future. Unless you expect your tax rate to be much higher later, you are probably better off claiming the deductions now. Furthermore, even if your tax rate was modestly higher in the future, by waiting several years to get those tax savings, it may not be worth it. If you could save 30% today or 35% in a few years, it may still be better to save 30% today just to get that refund in your pocket to do something else with it, like invest it or pay down debt. This is the “time value of money.”