Regarding RRSPs, the limit for tax deductions is 18% of your pre-tax earned income from the previous year, with a maximum limit of $31,560. To illustrate, if your pre-tax income in 2023 was $60,000, your deduction limit for 2024 would be $10,800 (18% x $60,000). If your pre-tax income was $200,000, the maximum limit of $31,560 would apply.
How much contribution room can I carry forward?
Suppose you opt not to contribute to your TFSA each year or do not contribute the maximum amount. In that case, you can carry forward your unused contribution room indefinitely, provided you are a Canadian resident, over 18 years of age, and have a valid social insurance number. If you make a withdrawal, the amount withdrawn will be added to your annual contribution room for the next calendar year.
In contrast, for an RRSP, you can carry forward your unused contribution room until age 71. Once you reach 71, you are required to convert your RRSP into an RRIF. Withdrawals from an RRSP do not create additional contribution room.
The tax deductibility of contributions
Your TFSA contributions are not tax-deductible and are made with after-tax dollars.
Your RRSP contributions are tax-deductible and made with pre-tax dollars.
Tax Treatment of Growth
It is essential to contribute to both RRSP and TFSA because of the different tax treatment of the growth within them.
A TFSA is ideal for short-term goals, such as saving for a down payment on a house or a vacation, as its growth is entirely tax-free. When withdrawing from your TFSA, you will not have to pay any income tax on the amount withdrawn. On the other hand, the growth within an RRSP is tax-deferred. This means you will not pay taxes on your RRSP gains until age 71, at which point you convert the RRSP into an RRIF and start withdrawing money.
RRSPs are more suitable for long-term goals such as retirement because, in retirement, you will have a lower income and be in a lower tax bracket, resulting in less tax on your RRIF income.