10 RRSP Tax Advantages You May Not Know About

If we told you that an RRSP is the type of account that allows you to:

A. Grow money for your retirement;
B. Set aside savings that will only be taxed when withdrawn, generally at retirement.

You probably wouldn’t be too surprised…we’re talking pretty common knowledge after all!

Now, what if we told you that this type of account also has many other advantages that are not as widely known? Yes, the RRSP has a lot more to offer!

In this blog post, learn more about 10 of these not so well-known tax incentives and how they can benefit you. Your future will thank you!

The RRSP allows you to…

1. Contribute now and reduce your taxable income later

Generally speaking, people tend to claim a tax deduction each year based on their RRSP contribution, in order to benefit from tax savings as soon as possible. While it may seem like a good idea to save on taxes yearly, did you know that depending on your current and future income, you could save more by claiming your tax deduction later? In fact, it is possible to apply your contributions to a later tax year!

If you expect your tax rate to be higher in future years – for example, if your salary is expected to increase or if your income this year is lower due to parental leave, a return to school, job loss, etc. – you can contribute to your RRSP now to generate tax-sheltered returns, but defer your tax deductions to a future time when you will be earning more money and therefore be taxed more, thus getting a larger tax savings.

2. Carry forward your unused contribution room

Good news: you don’t lose your unused contribution room and it never expires! (At least not until you turn 71.)

Each year, you are allowed to contribute up to 18% of your previous year’s gross income, up to the annual limit (for 2022, this amount was $29,210).

If you do not contribute the maximum amount to your RRSP in one (or more) tax years, the unused portion can be carried forward from one year to the next, and the next, and the next…indefinitely until you use it up!

To find out how much contribution room you have left, check your Canada Revenue Agency file.

3. Make excess contributions

We just told you that your annual RRSP contribution room is 18% of your previous year’s gross income, up to a maximum amount that is updated annually. All told that’s not quite right…because the CRA (Canada Revenue Agency) also allows for an over-contribution of up to $2,000. However, this excess contribution is not tax deductible!

It is supposed to be a margin of error for people who inadvertently over-contribute, but some people use it to maximize their tax benefit. Talk to your financial advisor to see if you could benefit from an over-contribution strategy!

*Be aware that if you exceed the $2,000 over-contribution limit, you will have to pay a penalty tax of 1% per month until you withdraw the excess.

4. Speed up the effect of compound interest

Ever heard of return on return? It’s a phenomenon that occurs when your investments generate returns, and those earnings are reinvested to generate returns, and those earnings are reinvested to generate returns… and so on! In short, it’s a snowball effect. With an RRSP, this effect is accelerated because your returns are tax-sheltered and can therefore be fully reinvested!

Also, time is on your side! The earlier you contribute, the more your investments have the opportunity to benefit from this multiplier effect.

For example, over a period of 30 years, with similar returns (say 5%), a saver who contributed $1,000 per year during the first 15 years (i.e. $15,000) could accumulate more than twice as much as another saver who contributed the same amount annually during years 16 to 30, thanks to the effect of compound interest.

Source : https://www.taxtips.ca/rrsp/start-young-to-maximize-rrsp-or-tfsa.htm

5. Customize your investment portfolio

Unlike an employer pension plan, an RRSP allows you to choose the types of investments you want to hold. Eligible investments include stocks, bonds, guaranteed investment certificates (GICs), exchange-traded funds and mutual funds.

If you don’t feel qualified to choose the right types of investments, don’t worry! With an RRSP, you can also select a financial advisor to help you manage your personal finances and choose the right ones for you.

If you are looking for an independent financial advisor, don’t hesitate to contact us!

6. Contribute even after retirement!

Contrary to popular belief, you can continue to contribute to your RRSP even after you retire. In fact, you can do so until you turn 71, after which you must close your RRSP and convert it to a RRIF or an annuity before December 31 of the year in which you turn 71.

That said, if you are 71 or older and still have contribution room available, it is possible to contribute to your spouse’s RRSP if your spouse is under 71!

7. Make an early withdrawal without tax consequences if…

You want to buy your first home or return to school full time!

The HBP (Home Buyers’ Plan) and LLP (Lifelong Learning Plan) are government programs designed to help first-time home buyers and people who want to go back to school to achieve their goal by making a withdrawal from their RRSPs without any tax penalty, meaning they don’t have to pay tax on the amount withdrawn.

To learn more about the HBP, we recommend that you read our blog post on the topic.

You can also find a list of eligibility requirements for the HBP and LLP on the Government of Canada website.

8. Access to certain credits and social programs

It’s simple: by contributing to an RRSP, you reduce your taxable income. Also, a lower income could make you eligible for certain credits and social programs (depending on your situation and your net family income, of course) or increase the amount of benefits you already receive! These include the Canada Child Benefit, the Family Allowance, the Child Care Expense Tax Credit and GST/HST credits

Talk to your financial advisor to find out how much you would need to contribute to take advantage of these benefits.

9. Save for your spouse’s retirement!

As a couple, if one spouse has a higher income than the other, it is possible for them to contribute to the RRSP of their lower-income partner to help bridge the salary gap. In addition, this allows the higher income spouse to get a tax deduction even if they haven’t contributed to their own RRSP!

Note that if you are the spouse with the higher income, your contributions to your significant other’s RRSP must stop at least 3 years before the latter’s retirement in order to avoid being taxed on the amounts contributed.

10. Splitting retirement income between spouses

When you file your income tax return, it is possible to do what is called “income splitting” from your RRIF (formerly your RRSP) with your spouse. Up to 50% of the income of the spouse with the higher income can be transferred to the spouse with the lower income. This allows for a more equitable distribution of income between partners with different incomes and can also result in tax savings.

For example, if the spouses’ withdrawals are $20,000 and $50,000 respectively, the couple will have to pay more taxes than if they both withdraw $35,000.

In conclusion

With a new fiscal year ahead of us, it’s time to think about optimizing your RRSP! If you think you can benefit from some of the advantages listed above, don’t hesitate to contact us so that we can evaluate your situation and determine how you can make the most of the tax incentives offered by the RRSP.