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.

3 Common RRSP Myths and Misconceptions

Thursday, March 1st, 2012

Having a good financial strategy is an essential part of preparing for a comfortable retirement. Contributing to a Registered Retirement Savings Plan (RRSP) should be part of the plan. Unfortunately, there are a number of RRSP myths and misconceptions which can get in the way of taxpayers getting the maximum benefit from these long-term savings accounts. How many of these have you heard of, and are they interfering with your retirement plans?

Myth #1: I can only contribute to an RRSP in the year I earned the income.

The amount that someone can contribute to an RRSP is based on his or her previous year’s income, so your earned income in 2010 is what your 2011 RRSP contribution is based on. However, you also have up until February 29, 2012 to make your 2011 RRSP contribution. This idea can be a bit confusing.

Dianne earned income in 2010 and has an RRSP contribution limit of $20,000 for 2011. If she contributed $10,000 to her plan in 2011 and another $10,000 between January 1-February 29, 2012, she has the option of claiming the entire $20,000 on her 2011 tax return or using the latter $10,000 on her 2012 income tax return.

Myth #2: RRSP contributions can’t be carried forward.

Many taxpayers do not make their maximum allowable RRSP contribution each year. It can be difficult to find the funds to save for retirement when paying day-to-day bills and expenses must be the priority. The federal government has changed the contribution rules so that taxpayers don’t lose their unused RRSP contribution limit. It can be carried forward and used later on, when the taxpayer has more money to put toward retirement.

If Sue has a $20,000 RRSP limit in a certain year and only contributes $5,000 into her plan, the other $15,000 is carried forward and added to her contribution room the next year. Sue would be able to contribute up to $35,000 into her RRSP the following year ($15,000 carried forward and $20,000 in new contribution room).

There may be times when taking the RRSP deduction may not make sense, even if you made a contribution in a particular year. If you know your income is going to be higher in the future, you can hang on to your RRSP deduction and use it then.

Myth #3: Contributing to a spousal RRSP means I can deduct twice as much each year.  

Spousal RRSPs can be a bit tricky to understand, and it would seem to make sense that contributing to someone else’s plan means that you can use their annual contribution limit as well as your own. Unfortunately, this is not the case and no matter whether your put money into your plan or your spouse’s RRSP, you can only use your contribution room to do so.

If Kate has a RRSP contribution limit of $20,000 for the year, she can put this amount into her own plan or make a contribution to her husband Bill’s RRSP account. Either way, Kate gets an income tax deduction for the amount of her contribution. If Bill earned money in the previous year, he could also make an RRSP contribution to his plan.

Now that you see how these 3 common RRSP myths and misconceptions have been debunked, make a point of getting tax your advice from a qualified financial advisor who can provide advice about your personal situation.

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.

Should I Invest into My RRSP’s or Pay Down My Mortgage?

Monday, February 6th, 2012

Our home is an important investment and our mortgage is probably the largest financial obligation we will ever have. However, our RRSPs are also very important and are for many the vehicle enabling us to have a comfortable retirement. So what should we do if we find we have surplus cash – pay down our mortgage or invest into our retirement?

Your mortgage is expensive- plain and simple. It is a long term debt paid with your after-tax dollars. The rule of thumb is to pay down those expensive debts first. So if you had a 25 year $250,000 mortgage with a 5 year term rate of 3.29% at the end of the 25 years you would of paid $116,187.11 in interest payments. If you made an extra $5,000 payment each year you will have saved $44,206 off your mortgage and 9 years off your amortization. That is a huge savings!! Another way to look at it, is a 3.29% return on your investment each year.

Hopefully, you will have enough time when the mortgage is paid to start aggressively saving towards your retirement. Remember, your house is a great investment but if your not generating enough income in retirement you will have to consider downsizing and using the equity to help with retirement costs. Or continue working.

So now let’s look at your retirement savings, what will you have coming in in retirement and what how much will you need to cover your essential and lifestyle costs? Do you have a company pension you’re contributing to? Do you feel comfortable replying on government pension income to supplement your shortfall? Do you have RRSPs or other savings? Finally, how far off are you from your desired retirement date? These are important factors in deciding whether or not to contribute to your RRSP versus your mortgage. Also what is the estimated rate of return you might get on your RRSP investment? If you’re an aggressive investor and potentially could return say 6 or 7% on your investment and you’re paying 3.29% (after tax dollars) the RRSP might be the obvious choice. And visa versa, if you have low risk tolerance and want to invest into a 1% GIC then paying down the mortgage may be the better choice.

The bottom line, you should meet with your financial advisor before making any choices. It is so important to have a financial plan in place that addresses all your goals. In the end, the best option may be to invest the most you can in your RRSP and then use the tax rebate to make an extra payment each year on your mortgage. By the time retirement rolls around you will be mortgage free and will have money in the bank. You CAN achieve both financial goals.

Back to Basics: A Reminder of RRSP Musts

Tuesday, January 31st, 2012

To play any game, it is important to know the rules and how they may affect the outcome or result of the game. Not to suggest that planning for retirement is a game, but knowing how RRSP rules can affect your retirement planning is very important. Below are a few of the “must knows” for your RRSP planning.

1. Maximize your contribution

The more you put away the more you will have. It is important to know the maximum allowable limit for your financial situation. Currently for 2011, you can contribute 18% of your prior year’s earned income up to a maximum of $22,450 less your pension adjustment (PA) and your past service pension adjustment (PSPA). Remember also that carry forwards of unused contributions from 1991 onward can also be contributed.

2. Contribute Today

The sooner you contribute, the sooner your savings start growing for your retirement. The compounding of interest returns can make a big difference on your RRSP balance over time.

3. Spousal RRSPs

Contributions can be made to a spousal RRSP that will allow income splitting at retirement which in turn will reduce the amount of tax that you will pay. Contributions are limited to your personal limit.

4. No More Foreign Content Limit

• 30% foreign content limit in RRSPs and registered pension plans is now a thing of the past.
• Canadian investors now have the option to invest up to 100% of their retirement plans into foreign securities, without penalty.
• Opportunities for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians – provides the opportunity for greater diversity and more attractive risk-adjusted returns.

5. Consolidation

Consolidating your assets leads to more efficient asset management as well as reduced costs. You should discuss with your advisor why consolidation would be right for you

Alert! The RRSP Deadline is Approaching!

Wednesday, January 25th, 2012

RRSP Contribution Deadline: February 29, 2012

With the deadline fast approaching, it’s important to remember that the maximum contribution limit for 2011 is $22,450.

RRSP Contribution Room:

RRSP contribution room is based on prior year’s earned income. It is the lesser of 18% of earned income or the maximum contribution limit. If you are a member of a Registered Pension Plan or Deferred Profit Sharing plan, your contribution room will be reduced by a pension adjustment.

Not sure on how much you can contribute?

The limit can be found on your Notice of Assessment that Canada Revenue Agency (CRA) sends after processing a tax return. It also includes any unused room.
The Tax Information Phone Systems (TIPS) also gives current contribution limit – Toll Free Number 1-800-267-6999. SIN and previous year’s tax return must be handy.
In addition, the new “My Account” online service on the CRA website can be used to check your RRSP deduction limit for 2010. My Account lets you get personalized information about your RRSP contributions and deduction limits as well as information about payments, installments, outstanding balances, statements of accounts and much more.

For more information, please contact me at 604-661-1532 or rhonda_sherwood (at) scotiamcleod.com.