Now is the perfect time to check where you RRSP contributions have been for the year, and where they’ll be in by the end of February. Do you have the room to put more in? Do you have some extra funds lying around? You may want to put the funds in now, and earn some income on them rather than wait until February; plus, you’re beating the rush and not scrambling to get them in by March 1st.
I’m going to assume you know what is an RRSP, and have hopefully checked what your contribution limit is for the year. Does your work have a pension plan? If so, how much have you contributed so far, as that comes your contribution limit. If you’ve reached your contribution limit, then what about your spouse? You can always put money into their RRSP, up to their contribution limit (they would need to be the contributor and annuitant).
Contribute early in the year. This helps shelter income for a longer period and increases the compounding of the income in the plan. A monthly plan can also be used to help with cash flow.
Use the spousal plan (including common-law spouse) as much as possible to split the income tax upon withdrawal. Remember not to withdraw from any spousal plan until 3 years after the last contribution was made or it will be added to the income of the contributor. Note that it is the timing of the payment of contributions to a spousal RRSP that governs this recapture rule, not when (or whether) you claimed a deduction.
Make your money work for you. Consider other investments within your RRSP, such as mutual funds. Carefully consider what you invest in to maximize your return. (See schedule on page 3)
Utilize “rollovers” (special RRSP contributions). You may find yourself in a situation where you receive a payment which qualifies for special contribution treatment.
These special situations include:
- Special payments you receive on leaving employment, either in recognition of long service or as damages for loss of office. Note that years of service after 1995 no longer qualify;
- Lump-sum payments received from foreign pension plans for services performed outside Canada;
- Lump-sum payments received from a United States IRA and taxable in Canada;
- Amounts received from the RRSP or RRIF of a spouse, or in some cases, a parent or grandparent, who has died; and • The “cost amount” of shares you receive, directly or through a trust, in a special lump-sum distribution from a DPSP.
The magic of compound interest! Annual contributions of $13,500 at an average interest rate of 8% per annum made at the beginning of each year accumulate over $15,000 more interest in the first 10 years than contributions made at the end of the year. After 25 years, the difference is over $75,000!
The compounding effect of interest earned on the RRSP is clearly demonstrated above by the difference in interest rates. An investment of $13,500 per year at 6% interest per annum grows to $785,111 at the end of 25 years, while the same amount invested at 8% grows to $1,065,885.
Should You Borrow to Finance an RRSP
Interest on money borrowed to make RRSP contributions is not a deductible expense for tax purposes. If you have a choice between borrowing to make an RRSP contribution or borrowing to make another investment, you should always borrow to make the other investment. The interest paid on the investment loan may well qualify for tax deduction and thus offset the cost of borrowing.
A spousal RRSP is an RRSP which names your spouse rather than yourself as the “annuitant” but you have made the contribution. Any amount, which you could have contributed to your own plan under your current contribution limit, can instead be contributed to your spouse’s plan. Contributions made by you to your spouse’s RRSP can be deducted from your income. Your spouse will be taxed when the funds are withdrawn subject to the 3-year rule described in Planning Opportunities above.
Once a cohabitation relationship achieves the status of a common-law marriage under the 12-month or child rule, that marriage is considered to continue until there is a marital breakdown marked by a separation of at least 90 days.
Common-law spouses are included in the definition of spouse and are, therefore, eligible for the spousal plan, although there are still some questions as to how Canada Customs and Revenue Agency will monitor the common-law relationships.
The special rules on spousal RRSPs are very beneficial. Ideally, you and your spouse should have the same amount in your RRSPs at retirement. However, when using a spousal RRSP, you should note that the contributing spouse would be taxed on any withdrawals within 3 years of the last contribution to any spousal plan.
Are You Leaving Canada?
If you leave Canada for an extended period, you must determine whether you are going to become a non-resident for income tax purposes.
If you have withdrawn funds from an RRSP under the Home Buyers’ Plan (you qualify as “first-time home buyers” could borrow up to $20,000 from an RRSP to purchase a “principal place of residence”), and become a non-resident before acquiring your Canadian home, your withdrawals will be disqualified and added to your income in the year of withdrawal. You may cure the disqualification by refunding the withdrawal and cancelling your participation in the plan.
If you have withdrawn funds from an RRSP under the Home Buyers’ Plan and become a non-resident after acquiring your Canadian home, you must repay the entire withdrawal within 60 days of becoming a non-resident. To the extent that you do not repay the amount within 60 days, the unrepaid balance will be included in your income for the period of the year in which you were still a resident of Canada and taxed accordingly.
Now is a great time to review your RRSP, and what you want to accomplish with it this year. Think about all that money you’re missing out on by not investing now, and waiting until January or February of next year. That’s a missed opportunity, and that’s just sad.