Guide to Contributing to RRSP for a New Entrant in the Job Market: Timing and Limits
Many new entrants to the job market like your son may wonder if they can contribute to their Registered Retirement Savings Plan (RRSP) early or if they need to wait to get the benefits like tax refunds. This article aims to clarify these concerns and explain the process step-by-step.
Understanding RRSP Contribution and Tax Refunds for New Entrants
When your son started working this year, he might be curious about making an RRSP contribution. However, it's important to note that he will need to wait until the next tax year to contribute to his RRSP and potentially receive a tax refund. Here's why:
Filing for the 2022 Tax Year
He should begin the process of filing his 2022 tax return early in 2023. Once he submits this return, the Canada Revenue Agency (CRA) will notify him of his deduction limit for the upcoming year, which is typically set for the next calendar year. This limit will determine how much of his 2023 total income he can deduct towards his RRSP contribution, or if the amount can be carried over to future years.
Waiting Until the 2023 Tax Year
For the year in which he started working, your son's contribution limit is effectively zero because his earned income for the previous tax year was insufficient. Therefore, he will have to wait until the 2023 tax year to make an RRSP contribution and potentially receive a tax refund. The CRA must review the current year's tax return to determine the contribution room for the upcoming year.
Small Loophole for Over-Contribution
However, there is a minor loophole that allows individuals to make an over-contribution of up to $2,000 in a single year without facing penalties. This means he can make a contribution higher than the limit for one fiscal year but must ensure that his accounts are in balance by the deadline the following year. If he opts to over-contribute, he will not be able to over-contribute again until he has brought his contributions to the correct limit.
Reviewing the Tax Assessment
A key piece of information will be the tax assessment letter he receives from the CRA, which provides details about the status of his RRSP contributions. This document contains a section at the bottom that outlines how his contributions have been calculated. It’s a good idea for him to keep this letter in a safe place for future reference.
Impact on Tax Refund
Even if he makes a contribution of $2,000, the resulting tax refund might not be substantial. This is especially true if he only worked part-time and has a relatively low income. The refund he receives from a $2,000 RRSP contribution will be significantly less than the amount he would have received if his income and contribution had been higher. Therefore, it's generally more beneficial to contribute a larger amount once his income has increased sufficiently.
Conclusion
To summarize, a new entrant in the job market must wait until the next tax year to make an RRSP contribution and potentially receive a tax refund. This is due to the need for the CRA to review the current year's tax return to determine the contribution limit for the upcoming year. However, there are some small loopholes, such as the ability to over-contribute by $2,000, which can be useful for strategic planning.