With the Registered Retirement Savings Plan (RRSP) contribution deadline around the corner, it’s only natural to have contributions on the mind. But there’s more to RRSPs than making regular contributions. Here are some ways to help you or a family member get more from an RRSP, now or in the future.
To appreciate how you could wisely use your annual RRSP tax savings or refund, jump ahead to retirement income from your RRSP or Registered Retirement Income Fund (RRIF). These withdrawals will be taxed at your marginal tax rate. But you can help offset that tax by investing your RRSP tax savings or refund each year. Depending on your situation, tax savings can be invested in your RRSP, Tax-Free Savings Account (TFSA) or non-registered account.
You don’t need to claim your RRSP tax deduction in the same year that you made the contribution – you can claim the deduction in any future year. Deferring the deduction can pay off when you expect your income to increase, resulting in a higher marginal tax rate. If someone contributes $10,000 to their RRSP and is taxed at the marginal rate of 30%, they save $3,000 in tax. But if they make the contribution and defer the $10,000 deduction until a year their marginal tax rate is 40%, they would increase their tax savings to $4,000.
Even though retirees can now split up to 50% of eligible pension income, a spousal RRSP can still offer tax advantages when one spouse is in a lower tax bracket.
Pension income splitting is only available when you’re 65 or older. But if you retire before 65, you can draw retirement income from the spousal RRSP or RRIF. Just plan for attribution rules – if you make spousal RRSP contributions in the year of withdrawal or two preceding years, withdrawals are taxable to the higher-income spouse.
By withdrawing from a spousal RRSP or RRIF, you can split more than 50% of pension income. This tactic could save tax if you also have employment, rental or business income.
You must convert your own RRSP at 71, but if you earn income and your spouse is younger, you can contribute to a spousal RRSP until the end of the year your spouse turns 71.
Are you an employee who has tax withheld from your paycheque and receives an annual RRSP tax refund? That refund is your own earnings that have sat in the government’s hands, much of it for more than a year. But there’s a way to receive immediate tax breaks throughout the year with each paycheque. You need to complete form T1213, Request to Reduce Tax Deductions at Source, available on the Canada Revenue Agency (CRA) website. Quebec residents must also complete form TP-1016-V, Application for a Reduction in Source Deductions of Income Tax, locatedon theRevenu Québec website.
Do you have a child who has earned money during the year from a summer job, part-time job or their own enterprises? Whatever your child’s age, you may want to encourage them to file a tax return, perhaps with your assistance. By reporting earned income, they create RRSP contribution room they can use later in life.
You could also go a step further. Help your child to open an RRSP – there’s no minimum age requirement. Then gift money to your child to use that contribution room now, while deferring the tax deduction to a future year.
Say a retiree is in a position to foresee they’ll be left with a significant balance in their RRSP or RRIF. These assets, taxed as income on the final tax return, sometimes represent the largest tax liability the estate faces. Here’s where the donation tax credit comes in. If the retiree names a charity as beneficiary of the RRSP or RRIF, the charity receives the plan’s proceeds and issues a tax receipt to the estate. The donation tax credit is applied against the tax liability, potentially offsetting 100% of the tax payable on RRSP or RRIF assets.