RRSPs: What do you know?
Most people know the basics of RRSP holdings but wise investors take the time to dig more deeply
For the most part, RRSP concepts and facts are easy to understand: You regularly contribute to RRSP-eligible investments, the accumulating investment amounts are tax-deductible and tax-sheltered until you make withdrawals in retirement, and you enjoy the considerable benefits of compound growth over the longer term. Those RRSP facts are plain and simple but here are a few lesser-known facts that will help you get the most from your RRSP eligible investments.
If you cease to be a resident of Canada you can still make contributions to your RRSP eligible investments using only Canadian-source earned income to calculate your contribution limit. There is a 25-per-cent withholding tax for payments to non-residents from investments held within a RRSP or RRIF but you can transfer qualifying lump-sum pension benefits or retirement allowances directly into your RRSP eligible investments without paying the withholding tax. You can also transfer funds between investments held within RRSPs without incurring a tax penalty.
In the year you turn 71 you must wind up your RRSP and take the cash, purchase an annuity or transfer the money to RRIF eligible investments, from which you will be required to withdraw annual amounts based on your age. If you are not earning much income, it might be more advantageous to start making withdrawals from your investments held within a RRSP/RRIF prior to age 71 to smooth out your taxable income in later years. Any undeducted contributions can be carried-forward until the year of death.
If you’re 72, have carry-forward room, and a spouse 71 or younger, you can make a contribution to a spousal RRSP eligible investments with your spouse as the annuitant.
Indeed, when retirement time rolls around, your RRSP eligible investments may be a significant source of your income – and you can make it even more significant by understanding – and taking full advantage of – its carry-forward potential.
Available RRSP contribution room may be carried forward to future years if the deduction is not claimed on the current year’s tax return. Add a few simple strategies and you can fill that carry-forward room in ways that will pay off for you now and later:
• Make a contribution now, take part of the deduction now. Use a portion your contribution for this tax year to reduce your taxable income to the next marginal tax bracket.
• Make a contribution now, take the deduction later. Make your maximum contribution to RRSP eligible investments in the current tax year but save the deduction for a later year when you know you’ll be in a higher tax bracket.
• Take an RRSP loan to fill your carry-forward room. This strategy works when the interest rate is low enough and you repay the loan as quickly as possible, preferably in one year or two at the most. You can use your tax refund to repay part of the loan.
• Shelter the non-eligible portion of a severance/retiring allowance. You can do this by using some or all of the allowance to fill RRSP contribution carry-forward room.
• Shelter a commuted pension paid out in cash. If you commute your pension and have received an excess – and taxable – amount in cash, you can use your RRSP carry-forward room to shelter at least a portion of the excess.
• Decrease withholding tax. When an employer makes direct contributions to your RRSP eligible investments, the employer need not apply withholding tax if the employee provides evidence that they have sufficient contribution room. The employee’s most recent Notice of Assessment from the Canadian Revenue Agency (CRA) is considered sufficient evidence of contribution room.
Knowing the facts about RRSPs and RRIFs and using the right strategies will help ensure you can realize all your retirement dreams.
– From the Investors Group library