Question: I am recently retired (January, 2012), 65 years old and married. My spouse is 56 and still working and will continue working for another 3 years. We own our home (no mortgage) and have no debt. I have a defined benefit pension ($63k/year) and my spouse earns $90k/year. When my spouse retires, pension will be about $35k/year. Both TFSAs are maximized to 2012. I have RRSP contribution room of $25k. I am wondering if I should top off my RRSP to claim the deduction against my 2011 income ($105k)?
Thanks in advance for your time, Ron
Answer: Hi Ron. Unused RRSP contribution room is an area of many questions. Based on some surveys out there, we should all hang our heads in shame for having any unused room at all. In your case, you have two issues to think about. One issue is the tax refund you will get by using up all of your RRSP contribution room. Given your 2011 income of $105K, you could put all $25K into your RRSP and know that you will get a pretty solid refund. It depends on your province, but your refund will likely be in the high 30- to low 40-per-cent range of your contributions. After this year, from what you have shared, your income will not likely be this high again. So purely from a tax refund perspective, this is the year that you will want to use up all of your RRSP contribution room.
The second issue relates to what happens when you pull money out of your RRSP and RRIF. An RRSP is valuable for its ability to shelter tax for a period of time. However, if you are only keeping money in an RRSP for three or four years, the tax sheltering is less valuable than sheltering for 20 or 30 years. In your case the tax sheltering is an advantage, but likely a little smaller than others because of your age. The other advantage is if you can get a 40-per-cent refund when you put the money in, but maybe pay 31 per cent when you pull the money out, you have gained 9 per cent from the difference in tax.
However, there is a negative. You don't really have control over minimum withdrawals once your RRSP is converted to a RRIF. Given your healthy pensions, you may ultimately both be in a position where Old Age Security is being clawed back. Whereas, if your RRSP or RRIF balances aren't that large, you may be able to avoid the clawback.
The bottom line is that this simple question can really only be answered if I know the value of your existing RRSP balances and other assets. The reason is that this last RRSP contribution could end up costing you $500 in clawed back Old Age Security every year for 20 years when you are both around, and $1,100 a year for another 10 years after the death of either of you. The survivor will be left with the RRIF, but not the ability to income split. Without a financial plan, it would be difficult to get a good sense of the likely amount of OAS clawback in retirement
So the answer is if the extra RRSP assets will not cause added OAS clawbacks, then you should certainly make the RRSP contribution this year. However, given that you and your spouse will have pensions of almost $100K combined, and CPP and OAS could easily add another $32K, even if you could split all your income and had no additional income, you would be at $66,000 each. It would take very little additional income from RRIF withdrawals or investment income to put you both into OAS clawback territory (this starts at $69,562 in 2012). If the $25,000 RRSP contribution will likely add to your OAS clawbacks, then you are probably better off not making the RRSP contribution – and leaving yourself with more planning flexibility in retirement.
Mr. Rechtshaffen is the president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner.
Mr. Rechtshaffen joined us on Wednesday, Feb. 22 for a live online chat about what kind of investment products belong in a RRSP. To read his comments, see the box below.
For tips, stories, videos and live chats ahead of this year's RRSP contribution deadline, check the Globe Investor 2012 RRSP season section for daily updates.
Ted Rechtshaffen