The long lockdowns and working from home during the coronavirus pandemic created the perfect saving opportunity for people across income levels. It’s no surprise Canadians socked away a whopping $50.1 billion into RRSP accounts in 2020, a 13.1% year-over-year jump, according to the most recent StatsCan data.
While millions of Canadians save for retirement each year, many of them don’t know how best to exploit their RRSPs beyond parking cash in it.
Indeed, some lesser-known and poorly understood features enhance the utility of RRSPs and open new avenues that can be used to meet your saving objectives.
The following are some unconventional approaches that can up your savings game and boost your RRSP benefits.
The Home Buyers’ Plan
First-time home buyers can make use of the Home Buyers’ Plan, which allows users to withdraw up to $35,000 tax-free from their RRSP each calendar year to buy their first home. Spouses or common-law partners may each withdraw up to $35,000 in the same year thereby gaining access to $70,000 in total. The amount borrowed from your RRSP under the Home Buyers’ Plan must be paid back to your RRSP in full over 15 years.
Not only are you benefitting by using ‘pre-tax dollars’ toward the down payment, but if you can pool your RRSP savings with other sources of funds you have a good shot at accumulating a down payment of 20% of the purchase price and avoid paying for mortgage insurance.
Cash is Tight? Try This
If cash isn’t readily available, you could make in-kind contributions. In other words, investors can transfer stocks, bonds or mutual funds held in a non-registered investment vehicle to their RRSP account as an in-kind contribution.
For tax purposes, though, your securities will be treated as disposed of and trigger capital gains tax. This means any gains will be taxable at the time of the transfer, but a loss will not be deductible. It may be prudent to sell the security and contribute cash proceeds to your RRSP unless the loss is negligible. Consider seeking expert advice before deciding either way.
Remember, if you do end up selling, you will need to wait at least 30 days before buying any of these securities back so as not to trigger a superficial loss, a rule that is aimed at preventing investors from taking advantage of their capital losses for tax purposes.
Spousal RRSP
Typically, a higher income spouse can split up to half of their pension income with a lower income spouse in a lower tax bracket upon turning 65. Thus, spousal RRSPs are a great way to reduce overall family taxes during retirement through income splitting as a couple. Be mindful, though, spousal RRSP contributions are deducted from the total allowable contribution limit of the higher income spouse, so keep track of your RRSP contributions.
The other benefit of a spousal plan is that it will not mature -- even if the contributing partner is older than 71 – so long as the other partner is still under the age of 71. In other words, if you cannot contribute to your RRSP because you are older than age 71, you can still contribute to your spouse's, or common-law partner's, RRSP until the time they turn 71, thereby continuing to take advantage of the tax deduction.
RRSP Excess Contributions
Many savers are unaware that they are allowed by the government to over-contribute a cumulative lifetime total of $2,000 to their RRSP without incurring a tax penalty.
This feature is designed to create a buffer in case an unintended calculation error in your contributions is in breach of the RRSP rules.
Over-contribution limit provides a legitimate way to save additional funds in your RRSP where they can grow on a tax-deferred basis, even if it won’t be deductible from your current year’s income.
That said, over contributions may be deducted in a subsequent year provided your actual RRSP contribution is less than the maximum allowed. This is particularly helpful if your cash flow is uneven, allowing you to contribute while you have the cash in hand.
Beware, though, that a penalty tax of 1% per month applies to the amount of any over-contribution more than $2,000, so make sure you don't exceed that amount.
Back to School
You can use funds in your RRSP to finance your or your spouse’s education, the same way as the Home Buyer’s Plan, under the Lifelong Learning Plan (LLP). The LLP lets you withdraw money out of an RRSP to fund your education.
Provided it is paid back into the RRSP over 10 years, the withdrawal will not be considered income and won’t be subject to withholding tax.
As long as you, your spouse, or your common-law partner are enrolled on a full-time basis, you can withdraw up to $10,000 per year to a maximum of $20,000 tax-free from your RRSP. Here are more details on the LLP features, how to access RRSP funds, various conditions to meet, and how to repay.
If you are looking to tap RRSPs for reasons other than retirement income, it may be a good idea to consult a financial professional to determine your suitability and options.
