Expanded Horizons: Navigating RRSP Season

Here we are – another year older and another “RRSP season” to navigate.

The Registered Retirement Savings Plan (RRSP) was introduced in 1957 with the purpose of encouraging people to save for retirement. Much has changed over the course of 60 years in the financial world: we see new investments and vehicles being introduced on a regularly basis, new regulations, and more. The one consistent feature is that February continues to be “RRSP season”. The reason is that those last minute contributions can be deductible from your prior year income, thus reducing your tax obligation. After all, who doesn’t like the idea of a tax refund at this time of year? However, planning for retirement should be more than just tax refunds, and perhaps February can become known as “retirement planning” month. 

Why invest in an RRSP?

The RRSP remains one of best ways to save for retirement. The investment options are diverse and your contributions are tax deductible. While the tax refund or reduced tax obligation frees up money to reinvest, experience shows it is more likely to be used for the purchase of toys.

The growth of the investments held by the RRSP is sheltered from tax until such time as they are withdrawn.1 The tax sheltered growth allows for your retirement account to grow more effectively and the “penalty” for withdrawing the funds makes you think twice before accessing the money you have saved for retirement. These factors combine to make it the perfect vehicle to save for retirement. 

Who can contribute to an RRSP?

Basically anyone with “earned income” can contribute to an RRSP within the limits described below.

To qualify for deduction for a particular year the contributions must occur within 60 days from the year end. For 2016 this means contributions must be made no later than March 1, 2017.

The contributions can be made to either an RRSP for yourself or to a spousal or common-law partner RRSP. This flexibility allows for those over the age of 71 to continue contributing to an RRSP, albeit only to a spousal or common-law partner RRSP and where the spouse or common-law partner is 71 or younger. This option enables a contributor to maximize any unused room accumulated during their working years or new room accumulated after the age of 71.

What are the contribution limits?

The contribution limit for a given year is based upon 18% of your “earned income” for the prior year up to a maximum (for 2017 the maximum is $26,010, minus any pension adjustments).2 In addition, any unused room from prior years carries forward, so don’t worry if you were not able to maximize your contributions! This is great news for most Canadians because as of 2014 there was $951 billion of unused RRSP contribution room.3

Where can I find my RRSP contribution limit?

The simplest way to find your RRSP contribution limit for a given year is to check your Notice of Assessment from the previous year. This is the document that the CRA mails to you after they have processed your tax return.

If you do not have this document handy the information can also be obtained directly from the CRA either by phone through the Tax Information Phone Services (TIPS) at 1-800-267-6999 or through their online portal: My Account. When calling into the CRA be advised that your identity will be verified by confirming your social insurance number, month and year of birth, and the total income entered on line 150 of your previous year’s tax return.

Once you have your deduction limit, simply adjust for any RRSP contributions made between March 1, 2016 and December 31, 2016 to determine your remaining 2016 limit.

Flexibility in claiming the deduction for your RRSP contribution:

While saving for retirement should be motivation enough to use the RRSP, contributions are largely tax motivated. What most Canadians do not know is that the deduction does not need to be claimed in the year the contribution is made. The contributions claimed reduce your taxable income dollar for dollar, thus the reduction of your tax obligation is dependent upon your income level. For some, income levels and other tax deductions can vary greatly from year to year. Deferring this particular deduction to a future year where your marginal tax rate is significantly higher can be extremely beneficial. 

Come tax season it is always better to have money owed to you than a big tax bill. A tax refund, however, is just a sign that you have paid too much in the first place. Wouldn’t it be great if you did not have to “lend” this money to the government?

Luckily for employees there is a relatively easy process to reduce taxes withheld at source. All you need to do is complete CRA Form T1213 – Request to Reduce Tax Deductions at Source. On this form you are asked to list various deductions from income and non-refundable tax credits, including your planned RRSP contributions, which you will declare on your tax return. The form, once approved, is then submitted to your employer who can then reduce the amount of tax withheld at source. This form typically needs to be filed annually.  

Building a retirement plan needs to be ongoing process. The Registered Retirement Savings Plan can be a powerful tool. The deadline of March 1, 2017 is fast approaching for those wishing to take advantage of the tax deduction for 2016. Now is the time to talk to your trusted financial advisor.

 

  1. Exceptions exist where funds may be borrowed from an RRSP without triggering a tax obligation. These are the Home Buyers Plan and the Lifelong Learning Plan.
  2. Earned income includes salary and bonus remuneration and rental income, but not passive investment income.
  3. Source: Statistics Canada CANSIM Table 111-0040 – Registered Retirement Savings Plan (RRSP) room.

 


This article was provided courtesy of Chris Geldert, CA. 

Chris Geldert is a dedicated member of the Financial Horizons Group team. As a Chartered Accountant who has been actively involved in the insurance industry since 2003, Chris brings a wealth of knowledge and experience to our advisors. From developing and presenting strategies, to providing independent recommendations on products suited to the client’s needs and risk comfort levels, Chris works to assist advisors grow their practice. 

The writer can be contacted at: chris.geldert@financialhorizons.com


Disclaimer: This article is intended to provide general information only and should not be considered as legal, accounting or taxation advice. Before acting on any of the information contained within this article, or before recommending a course of action, make sure your clients seeks advice from a qualified professional. Any examples or illustrations used in this article have been included to help clarify the information presented in this article and should not be relied on by you or your client in any transaction.