Your questions keep coming so let’s deal with more of them this week.
Start an RRSP at 70?
Q – I’m 70 years old and never had an RRSP. Is it advantageous or practical to contribute now? – L.M.
A – Maybe. It depends on how much you can contribute and your tax bracket.
Since you have never had an RRSP, you must have a lot of accumulated contribution room. If you are in a reasonably high tax bracket, you could generate a big refund for the 2019 tax year by opening an RRSP before the end of the month and contributing several thousand dollars to it. You will have to convert to a RRIF next year when you turn 71, but the money in the plan will be tax-sheltered until it’s withdrawn.
If you’re in a 40-per-cent tax bracket and have $25,000 to contribute, that will give you a $10,000 refund on your 2019 taxes. So yes, in this case it’s worth the effort.
On the other hand, if you’re in a low tax bracket and don’t have a lot of money available, I would suggest contributing to a TFSA instead. There’s no tax deduction, but the money will be tax-free when it is withdrawn. And there’s no age limit. You can keep on contributing to a TFSA until you die. – G.P.
RRSPs after 71
Q - My wife and I are 73 and have investments in TFSAs and RRIFs. I keep getting notes from the CRA that I have RRSP room hanging on from my working days. I’ve searched my Gordon Pape reference books trying to find if I have any use for this (RRSPs should be collapsed at age 71). It doesn’t seem like I can use this but thought that I would ask. – Mike T.
A - Yes, this is possible. You may have carry-forward room you did not use before converting to a RRIF. Also, you can generate new contribution room after age 71 if you have earned income. The question is, what to do with it? If you had a spouse under 71 years of age, you could contribute to a spousal plan and claim a deduction. In your case, however, that is not an option since you are both 73. - G.P.
Q - When does contribution room begin to accumulate for a TFSA? Is it when a person turns 18 years of age?
For instance, my son turned 18 in 2018. If he opens a TFSA this year does he have contribution room of $6,000 for 2018 and $6,000 for 2019? Total $12,000? Have I got that right? - Harold T.,
A - He actually has $17,500 in contribution room. That’s $5,500 for 2018 and $6,000 each for 2019 and 2020. - G.P.
Q - I’m thinking about parking some money in my TFSA in the Purpose High Interest Savings ETF (PSA-T). Is this 100 per cent secure? Or can you recommend another safe option? I’ll need the money in about a year. – Angel S.
A – This ETF invests in high interest accounts offered by five Canadian financial institutions. They are National Bank, Bank of Nova Scotia, CIBC, Bank of Montreal, and First Calgary Credit Union. These are all solid companies but when you ask if the fund is 100 per cent secure, the answer is no, to the extent that it is not covered by deposit insurance.
You might consider using Motive Financial, which offers 2.4 per cent on its TFSA accounts, with no fees and CDIC coverage. The Purpose fund charges 0.15 per cent and has a yield of 2.15 per cent. – G.P.
RRSP to TFSA
Q - My wife has a stock portfolio in her RRSP. She retired this year at 55 years old. She has no TFSA holdings. Can she move $6,000 into her TFSA from her RRSP without eventually paying tax since she has no income, based on the $12,000 personal exemption of tax-free earnings?
I know she will pay a 20 per cent withholding tax right away, but she will get that back and have $0.00 in taxes to pay, correct? – Martin H.
A – Yes, it appears this will work. As you say, the $6,000 withdrawn from the RRSP will be subject to a 20 per cent withholding tax but that will be recovered when she files her 2020 return. This assumes she has no income from other sources. – G.P.
That’s all for this week. If you have a money question you’d like me to consider, send it to email@example.com and write Globe Question in the subject line. I can’t guarantee a personal response, but I’ll answer as many as possible in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.