Personal Finance

RRSP first year contribution

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  • Feb 22nd, 2019 8:15 am
Deal Addict
May 15, 2013
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RRSP first year contribution

My nephew is 19 years old and has started his first job this year. He wants to know if he can start doing contributions to a RRSP. His employer is not matching it so it would be just him contributing.

Is he supposed to contribute up to $26,500 or calculate 18% of his annual salary who'd lower?
And the most important, can he ask for income tax reduction when filling taxes in 2020 for the tax period 2019? What I read is that he can only claim the contribution as a tax deduction if it's deposited in 2020, but I am not sure if i understood properly.

Thanks
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Deal Addict
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Mar 9, 2012
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Kitchener
He calculates his salary at 18% up to a max of $26,500 (for 2019).

For the second question, he'd have to fill in this form:

https://www.canada.ca/content/dam/cra-a ... 13-18e.pdf

Anything contributed in 2019 can count towards your 2019 return (filed in 2020) so technically he could reduce his taxes at source NOW, but he'd need ensure all his taxes are up to date, is aware that you have to fill in that above form yearly as well. And of course, actually make those RRSP contributions.

On thing to keep in mind, RRSP contributions done in January and February can count for either current year or previous year. Maybe that is where the mix-up occurred. He really should deposit it regularly (now through December or January/February 2020) if he asks for reduction of income tax.
Why can't we all just get along?
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Feb 19, 2010
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iamthebest wrote: My nephew is 19 years old and has started his first job this year. He wants to know if he can start doing contributions to a RRSP. His employer is not matching it so it would be just him contributing.

Is he supposed to contribute up to $26,500 or calculate 18% of his annual salary who'd lower?
And the most important, can he ask for income tax reduction when filling taxes in 2020 for the tax period 2019? What I read is that he can only claim the contribution as a tax deduction if it's deposited in 2020, but I am not sure if i understood properly.

Thanks
If this is his first job presumably he has no contribution room with which to make any contributions this year. You only get contribution room the year after the year of earnings. IOW, he can't make RSP contributions in 2019 as he won't have contribution room until 2020.

And, yes, the amount that he can contribute next year is 18% of earned income or whatever the top end amount is for next year, which ever is less.
Deal Addict
May 15, 2013
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jeff1970 wrote: He calculates his salary at 18% up to a max of $26,500 (for 2019).

But it is supposed to be 18% of your last annual income right? For first time employees you can just calculate the salary you plan to have for the whole year and take 18% ?

What happens if he makes the contribution this year but lest say on March or even December? Can he claim the tax deduction when filling the tax declaration in 2020 for year 2019?
Jr. Member
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Jan 23, 2019
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Black site, Canada
iamthebest wrote: But it is supposed to be 18% of your last annual income right? For first time employees you can just calculate the salary you plan to have for the whole year and take 18% ?

What happens if he makes the contribution this year but lest say on March or even December? Can he claim the tax deduction when filling the tax declaration in 2020 for year 2019?
Right. See @Conquistador 's post above. People new to the work force, or new to the country cannot contribute to their RRSP based on their first year's income until the following year.

If you move to Canada or start a new job fresh out of school you have to be careful to NOT signup for RRSP withholding from your employer to avoid tax problems.
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iamthebest wrote: But it is supposed to be 18% of your last annual income right? For first time employees you can just calculate the salary you plan to have for the whole year and take 18% ?

What happens if he makes the contribution this year but lest say on March or even December? Can he claim the tax deduction when filling the tax declaration in 2020 for year 2019?
Did you miss post #3? Why do you ask the question if you don't want the answer and then when you get it you ignore it? :eek:
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Jan 23, 2019
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Black site, Canada
jeff1970 wrote: [snip]
You should read above posts and redact yours since the advice is wrong and dangerous to anyone who follows it ... you do NOT want to regularly contribute to an RRSP in your first year on the job in Canada because you have ZERO contribution room for that tax year!
Deal Addict
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Nov 18, 2007
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Has he maxed out his TFSA?

Depending on his salary, the RRSP may not be the best savings method for a few years.
Deal Addict
May 15, 2013
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Conquistador wrote: Did you miss post #3? Why do you ask the question if you don't want the answer and then when you get it you ignore it? :eek:
The issue is that your answer is totally opposite to the first answer I got !!!

He said "Anything contributed in 2019 can count towards your 2019 return" and you said "he can't make RSP contributions in 2019 as he won't have contribution room until 2020".

I didn't ingore it, I just re-asked as I am even more confused.
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iamthebest wrote: The issue is that your answer is totally opposite to the first answer I got !!!

He said "Anything contributed in 2019 can count towards your 2019 return" and you said "he can't make RSP contributions in 2019 as he won't have contribution room until 2020".

I didn't ingore it, I just re-asked as I am even more confused.
So you chose the one that fit the narrative you were looking for. I get that.

Are you going to pay the penalty for his over-contributions?
Last edited by Conquistador on Feb 22nd, 2019 12:29 am, edited 1 time in total.
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Oct 4, 2004
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I'm going to make a few assumptions and come out and say that making contributions to an RRSP at 19 is probably not a good idea, with few exceptions, especially since the creation of the TFSA. Speaking as someone in their late-20's who only just opened an RRSP, I'm confident that I made the right decision in delaying this until now. When I was in high school, the RRSP was touted as something you should start contributing to as early as possible because of the power of compound interest but that's an outdated concept because here's the thing: compounding interest and investment return grows the same way in any savings/investment vehicle with the difference being that few are as restrictive as an RRSP. An RRSP is a tax deferral vehicle and not a general savings vehicle, so maximize your financial gain by using it for this purpose.

Assuming lower income, no employer match, soon to be progressively higher income, and future plans still to be determined (saving for a home, going to school, wanting a car, etc.): Unless your nephew is earning well over at least $42K, it makes little sense to open an RRSP especially if his plans are uncertain, as I know mine were at 19. If you nephew earns less than $13K, he's basically already paying no tax, in which case it would make absolutely no sense to open an RRSP.

Does you nephew understand that if he chooses to contribute to an RRSP, those funds will be locked up until essentially retirement? Does he understand that any tax savings will be negated (and even may severely cost him) if he ever needs to withdraw the funds in an emergency and he happens to be having a good year, income-wise? Does he understand there's only really two ways to withdraw from an RRSP without a tax penalty and that these amounts are capped?

In short summary, if your nephew has a short term savings goal like a car, travel or even a home, an RRSP is not the right vehicle to use. Top out the TFSA and continue to do so every year. Keep some funds liquid for a rainy day and only use the RRSP if you have lots of savings left over that you want to use to reduce your income by a bracket or two. If your nephew knows he wants to buy a home sometime in the next few years and wants to save up a downpayment, an RRSP could make sense but still only up to $25,000- even then, unless he's making good income, it may not be the wisest choice.
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Jan 23, 2019
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iamthebest wrote: The issue is that your answer is totally opposite to the first answer I got !!!

He said "Anything contributed in 2019 can count towards your 2019 return" and you said "he can't make RSP contributions in 2019 as he won't have contribution room until 2020".

I didn't ingore it, I just re-asked as I am even more confused.
Yes, you are confused ;) both of those statement-fragments you quoted are correct in isolation.

1. "[H]e can't make RSP contributions in 2019 as he won't have contribution room until 2020" is correct (well he can contribute, but they will all be over-contributions .... well okay, you get a $2k over-contribution exemption, but you get the point)
2. "Anything contributed in 2019 can count towards your 2019 return (filed in 2020)" is also correct, for people who have contribtion room in 2019, which your nephew does not have ;))

You don't earn contribution room until you file taxes.

The order of events here is:
1) 2019 - earn first income
2) 2020 - file first taxes (2019 tax year), thus earning contribution room that can be used for 2020 taxes and onwards
3) Make contributions using the contribution room you have

The only opportunity for fudging here is in early 2020 he can pre-calculate his contribution room and start making contributions in January before having actually filed taxes and gotten the Notice of Assesement telling him his limit.
Deal Fanatic
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Nov 19, 2004
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The question is, has he worked before? Many kids by age 19, have had some part time work. If so, check his NOA for available contribution space. If he has never worked before, then he has no space until the following year. Contribution space is added based on previous year income.
Deal Addict
Mar 8, 2013
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There is a lot of good information already posted here. I suspect that the motivation is to reduce income tax, even in the first year of employment. My suggestion is that if your nephew has no other particular goal (e.g. first home) but is able to save some of his employment income, then he should consider buying Canadian dividend stocks (better would be an ETF of such stocks). Because of the dividend tax credit, they may actually REDUCE his income tax, at least until he is in a high tax bracket. That is because the marginal rate is NEGATIVE in some provinces, such as Ontario, for this type of income. However, after starting this post, I checked and unfortunately Quebec does not have a negative rate - low but not negative. So this may not work for your nephew, but perhaps others can benefit.
Deal Addict
Jul 15, 2009
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The safe answer for anyone who's confused is to not try to calculate the limit yourself and go by the limit printed on your last NOA. Then you won't overcontribute.

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