Which process is used to determine the RRSP contribution limit for the current year?

The process for determining the Registered Retirement Savings Plan (RRSP) contribution limit for the current year is based on calculating 18% of the individual's earned income from the previous year and comparing that amount to the current year's RRSP dollar limit.

The correct approach is to take the lesser of 18% of the previous year's income and the annual RRSP contribution limit. This method ensures that individuals can contribute a portion of their income while also adhering to the maximum allowable contribution set by the government each year. In this case, the concept of using the previous year's income aligns with RRSP rules, as the contribution room is calculated retrospectively.

Understanding how previous earnings influence current contributions is crucial for effective financial planning. It also allows individuals to maximize their retirement savings opportunities based on the stability of their past income streams, while maintaining compliance with regulatory limits.