RRSPs: To Contribute or Not to Contribute: That is the Question

RRSP contributions help save for your retirement while providing immediate tax benefits. They are tax deductible, which reduces your annual income, which in turn lowers your total personal tax. 

Income earned in an RRSP plan is sheltered from tax, allowing your assets to grow in value much faster than if earned outside a plan. When you retire and begin to withdraw those funds, you will likely be subject to personal tax at a lower tax bracket than when contributions were originally deducted from your income. If you have earned income and have filed a personal income tax return in Canada, you can contribute to your RRSP until December 31 of the year you turn 71. You must also have contribution room available, to contribute towards your plan. 

Earned income is the sum of employment earnings, self-employment earnings, and certain other types of income, minus specific employment expenses and business or rental losses. Your RRSP contribution limit is the lowest of the following: 

      1. 18% of your earned income from the previous year (maximum $27,230 for 2020) 
      2. Maximum contribution limit for the current year 
      3. The lesser amount between 1) and 2) after deducting employersponsored pension plan contributions 

Your exact contribution limit amount is disclosed on the Notice of Assessment issued by the Canada Revenue Agency. Contributions for the current year can be made no later than 60 days into the following year (for the year 2020, the deadline to contribute to your RRSP is March 1, 2021). An RRSP plan can hold a variety of investments, the most common being: 

    • Cash 
    • Guaranteed investment certificates (GICs) 
    • Bonds 
    • Equities both Canadian and foreign 
    • Mutual funds 

Non-qualifying and prohibited investments include: 

    • Precious metals 
    • Personal property, including works of art, jewellery and antiques 
    • Commodity futures contracts
    • Debt or equity in corporations where you have an ownership interest of 10% or more
    • Shares or private holdings companies and shares of foreign private companies
    • Real estate 

You can contribute up to $2,000 over your limit for the year towards your plan. This over-contribution must be used in the following years, before any new contributions are applied towards your plan. Contributions in excess of the $2,000 over-contribution limit are subject to a 1% monthly penalty, until the excess contributions are withdrawn from the plan. You are permitted to transfer existing RRSPs to the former spouse or common-law partner on a tax-deferred basis, provided that you have a court order or separation agreement and that the RRSP transfer is settled at a time when you are living apart.  December 31 of the year you turn 71 is the deadline when you can make your last contribution. Your RRSP plan will be de-registered by the federal taxation authorities and the plan value will be fully taxed as a lump-sum withdrawal. To avoid this, you must contact your financial institution and complete the necessary application forms to convert your RRSP into a Registered Retirement Income Fund (RRIF). 

However, you can still make contributions towards your spouse’s RRSP plan until the year that he or she turns 71. You can continue to maintain your RRSP account until the year that you turn 71 as mentioned above. There is no obligation to withdraw any of the funds until then. There is no annual minimal withdrawal amount until the RRSP plan is converted into a RRIF. You can withdraw any discretionary amount, as needed to support your living needs during retirement.  However, note that any withdrawals will be included as income for that year, and taxed at your personal marginal tax rate.  When you die, the plan can be rolled over on a tax-deferred basis to your qualifying beneficiary (a spouse, common-law partner or a financiallydependant child or grandchild with a mental or physical disability). 

A child or grandchild is considered financially-dependant if they ordinarily lived with you and had a net income of less than the sum of their basic personal amount and the disability amount. 

Otherwise, where no designation of qualifying beneficiary is made, the full value of your RRSP plan is included as income in your final tax return. 

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