Most contributors to registered retirement savings plans know about the tax deductibility of contributions and the tax-free compounding of investment returns. But other, less well-known tax angles abound. Here are 10 of them.
Delayed deductions Carry forward your deductions to higher income years. The income tax deduction doesn’t have to be claimed in the year a contribution is made; it can be carried forward, even past age 71, and used in years when marginal tax rates might be higher.
Old-age contributions Make RRSP contributions after age 71. If you have earned income and contribution room after 71, you can contribute to a spousal plan as long as your spouse is younger than 71.
Income splitting Spousal RRSPs offer many opportunities for tax savings. They can expand income-splitting options for couples, especially before the age of 65 when RRSP and registered retirement income fund (RRIF) income cannot be split. But also after 65, if a couple wants to split more than 50 per cent of pension income. Withdrawals from a spousal RRSP can be invested in the name of the spouse without attribution to the contributing spouse if the withdrawals are made at least three years after contributions are made (reinvesting RRSP withdrawals may make sense, for example, as a way to move appreciating assets out of an RRSP – where capital gains are fully taxed upon withdrawal – to a non-registered environment where only half the capital gains are taxed).
Also, if a deceased spouse has unused contribution room and leaves behind a spouse younger than 71 with a spousal RRSP, the estate can make a contribution to the plan within 60 days of the end of the year of death.
Early RRIF conversion Convert your RRSP to a RRIF early. Holders of RRSPs wishing to make withdrawals can avoid withdrawal fees and tax withholding by first rolling RRSP funds into a RRIF, which can be set up at any age. After 65, conversion to a RRIF allows income-splitting with a spouse and pension income tax credits to be claimed on the first $2,000 in withdrawals.Contribute more
Over-contribute to your RRSP at age 71. If you have earned income in your 71st year, you can over-contribute just prior to the conversion of your RRSP to a RRIF in December. But you will need to pay a monthly over-contribution charge of 1 per cent for December on amounts above the allowable $2,000 limit (which, for example, would cost only $100 on a contribution of $10,000 over the limit).
Probate Avoid taxes on death. If the designated beneficiary of an RRSP is a spouse or financially dependent child or grandchild younger than 18, or is disabled, the RRSP of a deceased person can be rolled over to them tax free.
Transfers RRSP transfers can be made during a couple’s separation. With a written separation agreement or court order, a lump sum can be transferred tax free from one spouse’s RRSP or RRIF to the other spouse’s RRSP or RRIF.
RRSPs for children They can start generating contribution room. An RRSP can be set up for a child at any age as long as he or she has earned income and files a tax return. This starts generating contribution room. Then, when the child turns 18, a parent can deposit without penalty an over-contribution of up to $2,000 (there is no tax deduction, but the contribution compounds tax free).
Early refunds Get your income tax refund sooner. If you typically receive a tax refund in the spring, get it sooner by filing a TD1 or T1213 form instructing your employer to reduce the income tax withheld from each paycheque. This ends the interest-free loan to the government and allows you to reinvest your refund sooner in your RRSP.
Home purchase Buy a home sooner. Thanks to the tax refunds, couples can save money faster in an RRSP for a down payment on their first home, then use the Home Buyer’s Plan to borrow from their RRSP on an interest-free basis.
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.