2024-02-13 23:12:00
(Photo: 123RF)
As RRSP season approaches, millions of Canadians will be busy calculating how much they can or should contribute to their plan. However, many do not know how to maximize the benefits of this savings instrument beyond simply depositing money.
Here are five little-known strategies you can adopt to improve your RRSP savings.
Spousal RRSP
Using a spousal RRSP can be strategic to minimize family taxes in retirement by using income sharing between partners. Spousal RRSPs can play an important role in retirement planning in certain circumstances, providing benefits such as:
• While regular withdrawals from an RRSP do not qualify for pension income splitting, spousal RRSPs allow income splitting at any time, provided the three-year attribution rule is respected.
• After age 65, the pension income splitting rules allow you to split up to 50% of your RRIF income with your spouse. However, with spousal RRSPs, you can allocate more than 50% of your income to your partner (provided you have contribution room) and reduce your taxable income.
The Home Ownership Plan
First-time home buyers have the option of using the Home Buyers’ Plan (HBP), which allows them to withdraw up to $35,000 from their RRSP tax-free for the purchase of their home. first house. For couples, this amount rises to $70,000, which doubles the tax-free withdrawal limit. The amount borrowed from the RRSP under this plan must be repaid over a period of 15 years.
Consider the benefit of using “pre-tax dollars” for your down payment. The benefit is even greater when you combine your RRSP contribution with other savings, allowing you to get a down payment of at least 20% of the purchase price, thus avoiding having to resort to the mortgage loan insurance.
Excess RRSP contributions
Many savers are unaware that the government allows a $2,000 limit on lifetime RRSP excess contributions without imposing a tax penalty. This limit serves as a buffer in case an error in calculating contributions violates RRSP rules. Beyond this limit, excess contributions to an RRSP are subject to a penalty of 1% tax per month. This is why some Canadians prefer to contribute additional funds to their TFSA rather than exceed their contribution limit.
Although it is not deductible from your current year’s income, the $2,000 excess contribution limit nevertheless constitutes a legitimate way to deposit additional funds into your RRSP, where they can grow without immediate tax consequences.
If you still have excess contributions, they can be deducted the following year when your actual RRSP contribution is lower than the maximum allowed. This possibility is particularly useful if your cash flow is irregular. You can pay the contribution when you have the necessary cash.
Another example where you might consider deducting your $2,000 excess contribution is when you retire: the income earned during your last year of employment will entitle you to an RRSP deduction the following year.
Are you short of money?
If you’re short on cash, consider making in-kind contributions. This allows investors to transfer eligible investments, such as stocks, bonds or mutual funds, from a non-registered investment account to their RRSP. Remember, however, that for tax purposes these securities will be considered to have been disposed of, which might result in capital gains tax. It is important to check the base price of these assets; if gains are taxable at the time of transfer, losses are not deductible.
Likewise, think twice before transferring a security at a loss. Unless the loss is very small, consider selling the security and putting the proceeds in cash into your RRSP. If you intend to sell and plan to purchase the same shares in a registered account, avoid doing so for a period of 30 days before or following the sale. If you don’t do this, you will suffer a superficial loss, a rule that will prevent you from taking advantage of your capital losses for tax purposes.
Back to school
The funds in your RRSP can be used to finance your studies or those of your spouse under the Continuing Education Encouragement Plan (REEP), in the same way as the Home Ownership Plan.
As long as you or your spouse are registered full-time, you can withdraw up to $10,000 per calendar year from your RRSP, up to $20,000 tax-free (over a period not exceeding four years). ). Money borrowed under the LLP must be repaid to your RRSP over a period not exceeding 10 years.
Old age security and recovery tax
Eligible Canadians aged 65 and over are entitled to a supplemental income benefit called Old Age Security (OAS). The Old Age Security program provides additional income to supplement retirees’ income from other sources, including CPP, RRSPs and others.
However, seniors must repay all or part of their Old Age Security if their annual income exceeds a certain amount. This threshold, which changes periodically, is set at $90,997 for 2024. If your annual retirement income exceeds this amount, you will have to pay a 15% tax on the excess.
Here are some ways to avoid the Old Age Security clawback tax:
• Withdraw from RRSPs before age 65. If you anticipate your retirement income will exceed the OAS clawback threshold, it may be prudent to withdraw your RRSP to reduce your annual income before OAS takes effect.
• Consider taking advantage of income splitting. If you are close to the OAS clawback threshold, you may want to split your pension with your spouse, which would reduce your taxable income.
• Defer OAS payments. The government allows you to defer your OAS payments until age 70. This measure is particularly useful for people who are at risk of reaching the recovery threshold between the ages of 65 and 70.
• The TFSA can also help protect once morest the OAS clawback tax. Amounts withdrawn from a TFSA are not considered taxable income. This means that it is not taken into account in the calculation of overall net income, which is used to determine whether OAS clawback is appropriate. In addition, investment income generated by the TFSA is tax-exempt and is not taken into account when calculating net income. This can be very helpful for someone who is at or near the OAS clawback threshold.
Finally, it is always a good idea to consult a financial expert to determine whether these strategies are right for your personal financial situation.
A text by Vikram Barhat for Morningstar
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