It’s time again to consider all parts of your financial plan as well as strategize for the future. A big part of retirement planning in Canada is the RRSP. Most people know about the RRSP but few people truly understand the RRSP. Below are a few key facts about RRSP’s that will help you make better RRSP decisions in the coming year.
What are the maximum contribution limits?
Based on the current rules, your allowable RRSP contribution for the current year is the lower of 18% of your earned income from the previous year, or the maximum annual contribution limit (see bullet points below) for the tax year less any company sponsored pension plan contributions (Pension Adjustment).
- 2013 maximum RRSP contribution limit: $23,820
- 2014 maximum RRSP contribution limit: $24,270
- 2015 maximum RRSP contribution limit: $24,930
- 2016 maximum RRSP contribution limit: $25,370
Who can open RRSP’s?
If you have a social insurance number, earn income and have filed a tax return you can contribute to an RRSP until the 31st day of December on the year you turn 71. If after you turn 71 you still continue to earn income, you can contribute to a spousal RRSP until December 31st on the year your spouse turns 71.
So what is considered earned income?
For most people, earned income, at least for RRSP purposes, is the amount in box number 14 on your T4 slips. It is however important to note that money earned from full or part time self employment, CPP/QPP disability payments and net rental income are considered earned income as well.
If you are earning income from investments, pensions (to include DPSP,RRIF, OAS and CPP/QPP income), death benefits, taxable capital gains and income from limited partnerships, these do not qualify as earned income. You can always reference the CRA’s form T1023 which lists qualified sources of earned income.
What is unused/carry forward contribution room?
The contribution room for your RRSP can be carried forward. Any contribution room accumulated after 1990 can be carried forward essentially giving you future credit for contribution. If for example, you are unable to contribute your maximum amount allowable this year, you are able to make up the difference in subsequent years.
Over contribution and the 1% penalty
As long as you have reached the minimum 18 years of age, you are allowed to over contribute up to $2,000 into your RRSP. This over contribution can be used as a deduction in years to come. So if you over contribute $2,000 this year, it can be used as part of your deduction next year. It is important to note however that any contribution amount over the allowed $2,000 will be charged a penalty of 1% per month.
The spousal RRSP
The whole or a portion of your RRSP contribution can be made in the name of a spouse. One spouse can be the contributor, therefore they get the deduction, while the other spouse is the owner of the plan. It is important to discuss the tax implications of withdrawing from a spousal fund with your financial advisor.
What is the first time home buyers plan?
The home buyers plan (HBP) allows you to take up to $25,000 out of your RRSP to put towards the down payment of your first home without being taxed on the withdrawal. Keep in mind that you do have to pay it back into your RRSP over the following 15 years.
What is the life long learning plan?
The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 a year or up to $20,000 maximum if you enroll in an LLP program to help pay for your education. You are only required to pay back at least 10% per year for up to 10 years. If you participate in this plan, you must begin repaying two years after your last eligible withdrawal, or five years after the initial withdrawal, depending on which due date comes first. All amounts you withdraw must be repaid in that 10 year span.
So what’s the deadline to receive a tax deduction?
Per the current rules, the deadline for RRSP tax contribution is 60 days after the end of the previous year to be eligible for a tax deduction. So this year, the deadline is February 29th. Keep in mind that if you are turning 71 this year, then this is the last year in which you can contribute to your RRSP. Remember that you must convert your RRSP by December 31st in the year you turn 71.
To get a more detailed understanding of your RRSP’s and other retirement and investment options, reach out to me directly and I will be happy guide you through the process of effectively planning for your future.