Are you ghosting your RRSP?

November 6th, 2023

When it comes to managing their Registered Retirement Savings Plan (RRSP), it’s easy for many investors to fall into a routine. Make your contributions to mutual funds. Claim the tax deduction. Repeat.

But there may be a problem if you only follow this routine, then ignore your RRSP. You could miss out on ways to make the most of your plan. Here are some strategies to consider.

When a spousal RRSP saves you tax

Ever since retirees became able to split up to 50% of their eligible pension income with their spouse, the usefulness of a spousal RRSP came into question. A spousal RRSP can still offer tax advantages in three situations, provided one spouse is in a lower tax bracket.

You retire before age 65. Splitting eligible pension income is only an option when you’re 65 or older. However, if you retire before 65, you can draw retirement income from mutual funds in your spousal RRSP, with those dollars taxed in the hands of the lower-income spouse.

You wish to split more than 50%. In some situations where the higher-income spouse has employment, rental or business income, the couple may wish to split more than 50% of their pension income. They can achieve this by making withdrawals from a spousal RRSP or spousal Registered Retirement Income Fund (RRIF).

You earn income past age 71. You must close your RRSP at 71, but if you earn income and have a younger spouse, you can contribute to mutual funds in a spousal RRSP until the end of the year your spouse turns 71.

Your RRSP refund can boost retirement income

In retirement, your RRSP or RRIF withdrawals will be taxed at your marginal tax rate. But in your working years, you can take your annual RRSP refund or tax savings and invest the funds – dedicated to helping offset the eventual tax on RRSP or RRIF withdrawals. You can invest your tax refund or savings in mutual funds in your Tax-Free Savings Account (TFSA) or a non-registered account.

Claiming your tax deduction in a future year

Normally, you claim your RRSP tax deduction in the year you make the RRSP contribution, but you can claim the deduction in any future year. It can pay to defer the deduction if you expect an increase in your income – a higher marginal tax bracket results in greater tax savings.

Making a tax-smart donation

Any mutual fund investments remaining in an RRSP or RRIF when the plan holder passes away are taxed as income, payable by the estate. But there’s a way to offset this tax. You name a charity as the beneficiary of your RRSP or RRIF, and the resulting donation tax credit is used on the final tax return to offset the tax owing on the plan’s assets. Note that in Quebec the charity must be designated as an RRSP or RRIF legatee in a will.

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