Delay the tax deduction for your RRSP contribution until your pay rises, and reap the benefit
When retirement time rolls around, your RRSP-eligible investments may be a significant source of your income, and you can make it even more significant by understanding – and taking full advantage of – its carry-forward potential.
Available RRSP contribution room may be carried forward to future years if the deduction is not claimed on the current year’s tax return. Add a few simple strategies and you can fill that carry-forward room in ways that will pay off for you now and later:
Make a contribution now; take part of the deduction now. Use a portion of your contribution for this tax year to reduce your taxable income to the next marginal tax bracket.
Make a contribution now; take the deduction later. Make your maximum contribution to RRSP-eligible investments in the current tax year, but save the deduction for a later year when you know you’ll be in a higher tax bracket.
Take an RRSP loan to fill your carry-forward room. This strategy works when the interest rate is low enough and you repay the loan as quickly as possible, preferably in one year or two at the most. You can use your tax refund to repay part of the loan.
Know your age-related options. If you’re turning 71 this year and don’t have a spouse who is younger than 71, this is your last opportunity to make a contribution to your RRSP-eligible investments, although any uneducated contributions can be carried forward until the year of death.
If you’re 72, have carry-forward room and a spouse 71 or younger, you can make a contribution to a spousal RRSP eligible investment, with your spouse as the annuitant.
Shelter the non-eligible portion of a severance/retiring allowance. You can do this by using some or all of the allowance to fill RRSP-contribution carry-forward room.
Shelter a commuted pension paid out in cash. If you commute your pension and have received an excess – and taxable – amount in cash, you can use your RRSP carry-forward room to shelter at least a portion of the excess.
Decrease withholding tax. When an employer makes direct contributions to your RRSP-eligible investments, the employer need not apply withholding tax if the employee provides evidence that they have sufficient contribution room. The employee’s most recent notice of assessment from the Canadian Revenue Agency is considered sufficient evidence of contribution room.
Make the most of your RRSP-eligible investments and pay yourself forward in the most advantageous ways by talking over your life goals with your professional advisor.
Liz Findlay is a financial consultant with Investors Group. You can reach her at 204-7886-2708.
This column, by Investors Group Financial Services Inc., presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group consultant.