Rhonda's Financial Blog

What You Need to Know About RRSP Carry-forwards

Monday, March 5th, 2012

Do you find the term “RRSP carry-forwards” confusing? If so, you’re not alone. A Registered Retirement Savings Plan (RRSP) is a way for taxpayers to put money aside which can provide a source of income later in life, as well as get a tax deduction now. The “carry-forward” part of that term simply means that taxpayers have some flexibility in the amount they contribute to their plan and when they use the tax deduction they are entitled to for making that contribution.

RRSP Carry-forwards for Unused Contribution Room

For each year that you earned income, you have a set maximum which you can contribute to your RRSP. Not everyone contributes the full amount that they are entitled to into their retirement savings plan each year. This is not a situation where if you don’t use it you’ll lose it, though; any unused contribution room is simply carried forward to future tax years indefinitely.

If you have a year where your income is higher than in previous years or your expenses have gone down, you have the option of taking the extra money and putting into your RRSP. One way you can contribute to your RRSP and take advantage of your unused contribution room is to take your income tax refund and contribute it to your plan. That way, you don’t have to try to find a way to make more money to use for retirement savings, and you get a tax deduction for the amount that you deposit into your RRSP.

The amount of your unused RRSP contribution room is listed on the Notice of Assessment you receive from the Canada Revenue Agency each year. You can also find out the amount of your unused RRSP contribution limit by signing up for My Account on the Canada Revenue Agency website. Once your account has been activated, you will be able to view this information online.

RRSP Carry-forward for Undeducted Contributions

The other type of RRSP carry-forward that you can take advantage of is for undeducted contributions. What this means is that if you didn’t take the deduction for your RRSP deduction on your income tax return, you can use it later on.

Why would you choose not to take a tax deduction that you are entitled to right away? If your income will be higher in later years, you can use the deduction to reduce the amount of income tax you are required to pay. Contributing to your RRSP now means that you can get the power of compound interest working for you sooner and end up with more money available to you when it’s time to retire.

Tax matters can be complicated and it can be challenging to figure out how much you should be be contributing to your RRSP each year and when you will get the maximum benefit from the deduction on your contribution. If you have questions about the right strategy for your tax situation, make an appointment with a qualified financial planner for assistance.

Can You Make an RRSP Contribution After Age 71 if You Are Earning an Income?

Wednesday, February 15th, 2012

If you are turning 71 this year, you may be fully retired and enjoying your golden years pursuing activities which you didn’t have time for while working. You may still be in the workforce on a full or part-time basis, and reaping the benefit of the additional cash flow.

RRSP Decision Time

Since you will be blowing out 71 candles on your birthday cake, your financial advisor will let you know that you need to make some decisions about your RRSP (Registered Retirement Savings Plan). One of the choices, which likely doesn’t make a lot of sense for most people, is to withdraw the full amount in cash and pay tax on it as a lump sum. You also have the option of transferring the funds from your RRSP directly into an annuity or a Registered Retirement Income Fund (RRIF). Another choice is to divide your RRSP funds into two or more of these options.

At this point in your life, you may be receiving income from government pensions, a company pension plan, personal investments, your RRSP, as well as from your employment. As a result of these multiple sources of income, you may be pushed into a higher tax bracket, resulting in either a partial or complete claw-back of your Old Age Security (OAS) benefit.

Is there something you can do to remedy this situation? Can you contribute to your RRSP if you are still working?

RRSP Contribution Strategy

One thing that works in your favor is that you have to the end of the year in which you turned 71 to convert your RRSP into cash or another financial product. Based on the amount you earned, you may have RRSP contribution room for 2013. Consider making that contribution in December of 2012 so that it can be credited to your RRSP while the plan is still open.

You will be charged a penalty of one percent per month on any RRSP contributions which are over the allowable limit of $2,000. The good news is that your tax savings should be much higher than the penalty you would have to pay.

Example of RRSP Contribution at Age 71

Here’s an example of how you can take advantage of the RRSP deduction in your 71st year:

Sue is a psychotherapist who was still working in the year she turned 71. Her RRSP limit for 2013 is $20,000 but since she is supposed to close her plan at the end of 2012 and convert it into another vehicle, how can she make the most of her contribution limit?

She can contribute $20,000 to her RRSP in December of 2012, even though this means she will have overcontributed to her plan. Under existing CCRA rules, Sue would have to pay a one percent penalty for each month her contribution was over the limit of $2,000. In this instance, the one percent penalty on the over-contribution of $18,000 ($20,000-$2,000) would only be calculated for December and would work out to $180.00. The penalty would drop off as of January 2013, since Sue would have a contribution limit of $20,000 based on her prior year’s earnings.

Assuming Sue gets 40 percent of her RRSP contribution back as a tax rebate, she would have to “spend” $180 to get a refund of $8,000. This definitely works out to her benefit.

Another way that Sue can continue to make RRSP contributions after she turns 71 is if her spouse is younger than she is. In that instance, she can make a contribution to a spousal RRSP and deduct it on her income tax return. She can also take advantage of the same over-contribution strategy in December of the year her spouse turns 71.

Before you plan to use this strategy to contribute to your RRSP after you turn 71, speak to a financial advisor. He or she may be able to suggest other moneysaving options, such as splitting the income received from eligible pensions, annuities or RRIFs with your spouse.