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What to consider if you still have RRSP contribution room

January 25, 2021 Jason Heath
What to consider if you still have RRSP contribution room

Last chance to convert a RRSP to a RRIF: Registered retirement income fund (RRIF) conversion must happen by Dec. 31 of the year the contributor turns 71, with minimum withdrawals beginning the year the contributor turns 72.

RRSP myths

RRSPs are risky: The truth is, RRSPs may or may not be risky. A RRSP is just a tax-deferred account that holds investments. You can hold cash, guaranteed investment certificates (GICs), bonds, stocks, mutual funds or exchange traded funds (ETFs). Mutual funds are the most common investment choice, but mutual funds themselves can range from savings accounts (money market mutual funds) to bond funds to stock funds, with varying levels of risk. 

You should contribute to an RRSP as early as possible: You can contribute to a RRSP as soon as you have earned income, such as employment income, to create RRSP room. There is no age limit, but investment accounts are difficult to open until a minor child attains the age of majority (18 or 19, depending on their province or territory of residence). RRSP tax deductions may not be advantageous for a young person with a low income, and TFSAs may provide more flexibility for deposits and withdrawals for a teenager or someone in their early 20s, anyway. 

You should contribute to your RRSP every year: RRSP contributions and the tax deductions they provide are more advantageous in higher income years. Someone with a low or moderate income may be better off contributing to a TFSA. Someone with a low investment risk tolerance may be better off paying down debt. 

RRSPs are taxed heavily on withdrawal: RRSP withdrawals are fully taxable in the year of withdrawal, except for the above-mentioned HBP and LLP withdrawals. But RRSP contributions are tax-deductible, and RRSP investments grow tax-deferred. Ideally, a contributor deducts contributions in a high-income year, benefits from many years of tax deferred growth, and takes withdrawals at a lower income and tax rate in retirement. Many full-time workers will benefit from RRSP contributions.

TFSAs are better than RRSPs: Actually, TFSAs are different from RRSPs. TFSAs may be better tools for young people who are just starting to save, and may be making deposits and taking withdrawals from their account. TFSAs may be a better option for a saver with a low income, or someone who expects their income to rise in a subsequent year. TFSA withdrawals can be used to fund RRSP contributions in the future. Taxpayers with no earned income do not accumulate RRSP room and may not be able to contribute to a RRSP, but TFSA room accrues for any Canadian resident who is 18 or older. 

RRSP withdrawals can be split with your spouse: Pension income-splitting allows RRIF withdrawals to be split up to 50%, starting when the account holder turns 65, with a spouse or common law partner, regardless of the spouse’s age. RRSP withdrawals are not eligible for pension income-splitting. 

RRSPs are fully taxable on death: RRSPs or RRIFs that are left to a spouse or common law partner can be transferred to that surviving spouse’s RRSP or RRIF on a tax-deferred basis. There are also exceptions for a financially dependent minor child or grandchild, or a child or grandchild with a disability. Otherwise, the value of a RRSP on the date of death of an account holder is added to their income on their final tax return and is fully taxable. 

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