Right now, thinking about Registered Retirement Savings Plans (RRSPs) is likely at the bottom of your list of important things to do. However, with the 2020 contribution deadline looming on March 1, I'd suggest that learning to make the most of your RRSP contributions might be just what the doctor ordered in terms of saving some money for retirement and getting some tax breaks while you do it (and to provide some semblance of normalcy in these days). So here are some tips to get you started.
1. Take full advantage of spousal RRSP
A spousal RRSP is simply an RRSP where you make the contributions, but the plan is in your spouse's name – that is, it's owned by your spouse. It's a relatively straightforward way to split income. When you contribute to an RRSP in your spouse's name, you receive a personal tax deduction. But since the RRSP belongs to your spouse, amounts received from the plan generally will be taxable to your spouse, not you.
The object of a spousal RRSP is to allocate taxable income as evenly as possible between you and your spouse, so that you will both be in a fairly modest tax bracket. So, if your spouse will be in a lower tax bracket than you when the RRSP is paid out, a spousal RRSP makes sense because withdrawals eventually will be taxed in his or her hands.
Another advantage is that the maturity deadline of a spousal-RRSP is based on the age of your spouse. So if you're too old to contribute to your own RRSP, it may be possible to continue to contribute to a younger spouse's RRSP. Of course, you must have what's known as "earned income" to do this (which includes employment or business income, alimony received, and rental income, among other income sources. It does not include items such as investment income). A spousal plan may also be a good idea if the contributor spouse is concerned with potential creditor problems.
There are rules relating to "quick withdrawals." Amounts withdrawn from a spousal RRSP must be included in the income of the contributor spouse to the extent of tax-deductible contributions either in the year of withdrawal or in the previous two years. This includes "lump-sum" RRSP withdrawals made after the plan has matured.
Note that to the extent that you are pension splitting (that is, where up to half of eligible pension income (including RRSPs) is allocated to a lower-income spouse or partner), the spousal RRSP may not give you any additional benefit.
2. Make "catchup" contributions
If you haven't "maxed out" on your RRSP contributions in the past (going back to 1991), you're entitled to make an additional contribution over and above your normal limit for the year. That's because effective from 1991 onward, your "unused" RRSP contribution limit can be carried forward indefinitely to future years. Of course, one of the biggest barriers between you and your writeoff could be finding the means to make a catchup contribution. Possible sources for your catch-up contribution could include inheritances, contributions in kind, an RRSP mortgage, or borrowing.
But beware of a possible tax trap. If you make a very large RRSP contribution, you could be subject to the so-called "Alternative Minimum Tax." Even if this is the case, though, the extra tax you pay can be applied to reduce your future regular taxes. In the meantime, your RRSP nest-egg will be earning income on a tax-sheltered basis.
Another thing to bear in mind is that the higher your tax bracket, the more effective your RRSP contribution will be. So, a low-income year may not be a good time to make a catch-up contribution. If your annual income is such that you're not "too far into" a particular tax bracket, you may want to make a series of RRSP contributions that take you down to the "bottom of the bracket." Another alternative could be to make a lump-sum contribution but defer the actual deduction until a year when you're in a higher bracket.
Previously published in The Fund Library on February 18, 2021, by tax and estate planning lawyer, Samantha Prasad. Portions of this article first appeared in The TaxLetter, ©2021 by MPL Communications Ltd. Used with permission.
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