RRSP Strategies: Beyond the Basics

RRSPs are a valuable tool for many taxpayers, which is why they are the backbone of many retirement plans. Getting the most out of your RRSP often involves thinking several years ahead, rather than just when the contribution deadline is looming.

Here are five RRSP strategies to get you thinking beyond the basics:

Claiming RRSP deductions

Most of us claim our RRSP deductions in the tax year we make the contribution, but you don’t have to. In fact, you can choose to deduct only a portion or none at all and carry it forward.

If you expect to move into a higher tax bracket next year from say, a big promotion, or the sale of rental property, you should still make your contribution to take advantage of tax-free compounding. But, it may be worth waiting to claim the deduction the next year (or later) when your marginal rate will be higher and you will get a substantially bigger tax refund.

Level out income

Although RRSPs are designed for retirement savings, sometimes it’s useful to use the money ahead of time, even though you give up years of tax deferred growth. If your income varies quite a bit from year to year, or if you decide to take a year off to write your book or go back to school, you could sock away as much extra RRSP money as you can during your higher earning years and withdraw (and pay the lower tax) in the leaner years.

If you consider this strategy, remember that you still need to keep some RRSP funds intact for when you’re finally done working.

Pre-retirement fill-up

If you are approaching retirement, have lots of unused contribution room, and expect to be in a lower tax bracket when you retire, consider contributing as much as you can during your last good income year, even if you plan to take some out shortly thereafter. If funds are tight, consider an RRSP loan.

Or, instead, withdraw money from your TFSA to make this final RRSP contribution before the end of the year.

Post-retirement contribution

After you retire, your unused contribution room doesn’t disappear. You could continue to make contributions to your own RRSP until the end of the year you turn 71.

Why would you want to do that at a time when you’re thinking more of making withdrawals?

  • If you are liquidating assets that would push you into a higher tax bracket such as the family cottage, or shares in a private company.
  • If your income in early retirement is more than you expect to have in your later years, such as if you’re working part-time.

Spousal RRSPs

Spousal RRSPs are a form of income splitting, designed mainly for single-income families or those that have a large disparity in income.

If you get your timing right, withdrawals will be taxed in the receiving spouse’s hands, and if that spouse does not earn any other income, may be completely tax free.

Note that you have to completely turn off the funding two full calendar years before starting withdrawals, so it makes sense to always have your contribution in by the end of the year. (e.g. If you make your last contribution by December 2017, your spouse can withdraw as early as January 2020. If you wait until January 2018 to make the contribution, the withdrawal can’t be made until January 2021.)

If you have the available contribution room, you can keep making spousal contributions even after the year you turn 71, up until your spouse reaches that milestone.

If there is a significant age difference between spouses, it’s possible that someone in their 80’s and beyond can still put money into a spousal plan. The older spouse might use his or her minimum required RRIF payment each year to fund an identically sized spousal RRSP contribution. Not only would the contribution offset the tax hit from the RRIF payment, the money would continue to compound until the spouse opens his or her own RRIF.

For couples planning to retire at different times, this technique can be a good way to fund an early retirement for one of them.

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17 Comments

  1. Gert on November 15, 2017 at 7:06 am

    Hi Marie,

    If I take out money from my RRSP, how much can I take out not to be taxed? I stopped working 2 years ago and have had no need to withdraw but someone told me if I stay under a certain amount I won’t pay tax, is this true? At tax time is it our total household income that is looked at, my wife is still working, or am I really tax free? Is this a good strategy?

    • boomer on November 15, 2017 at 11:07 am

      Hi Gert. The Federal Basic Person exemption allows $11,474 (for 2017) tax free. If you are 65+ there is also the age exemption of $7,125 (this amount is income based – less than approx. $35,000 taxable income). This is based on your personal income, not combined household income.

      If you don’t need the money you could put it in your TFSA if you have contribution room.

      Your financial institution would still take withholding tax when you withdraw funds, but you get this back when you file your tax return.

      • Gert on November 17, 2017 at 7:49 am

        Thanks Marie
        I love reading your articles which have real value. I’m 55 so this information is so useful.
        Gert

        • boomer on November 17, 2017 at 1:49 pm

          Thanks for being a regular reader, Gert.

  2. Frito on November 15, 2017 at 9:37 am

    What benefit can you possibly get by transferring funds from a TFSA to an RRSP? You would be taking tax free sheltered funds and making them taxable in the future. The short term tax savings now will cost more out of your pocket down the road. Certainly not something I would consider doing.

    • Arlene J on November 15, 2017 at 12:02 pm

      The article refers to giving tax relief in a high tax year and then taking out RRSP funds in a year when the tax rate is lower. That is the whole premise behind making RRSP contributions…..making a contribution in a high tax year (presumably while you are still working) and taking it out in a low tax year (once you have retired, usually). It doesn’t matter where the money comes from. This person could save (for example) 45% in that year by making a contribution and then when the tax rate drops, only pay 25% to take it out. It is solid financial planning.

    • Walter on November 15, 2017 at 1:08 pm

      I think she means that may be advantageous when the contributor is currently in a high tax bracket and will be in a lower tax tax bracket upon the eventual withdrawl of those funds from the RRSP.

  3. boomer on November 15, 2017 at 11:12 am

    Hi Frito. If you would have read the sentence “… and you expect to be in a lower tax bracket when you retire…..and plan to take it out shortly thereafter.” It would not cost you more down the road.
    Admittedly, this is not for everyone – and obviously not for you – but it can work for someone in a high working tax bracket.

  4. Louise Mills on November 15, 2017 at 11:19 am

    You write that you can still make unused contributions to your RRSP even once you have retired. Do you have to have work income or is the contribution made without the tax deduction?

    • boomer on November 15, 2017 at 4:15 pm

      @Louise Mills. You have to have employment income to earn contribution room. Once you have it you can use the deduction when and if it is advantageous to you even if you are no longer working. One example is if you are expecting substantial capital gains from selling property.

  5. A. Keith on November 15, 2017 at 12:03 pm

    Hi Marie,

    I’m confused. I thought one had to have “earned income” to make any RRSP contributions (to one’s own account or to a spousal account). If that’s the case, then your example of the 80+-year-old using RRIF payouts to make spousal RRSP contributions won’t work unless the 80-plus person is engaged in remunerated work (as an employee or an independent contractor). Further, given adequate contribution room, the contribution can be only a certain percentage (18% ?) of the earned income for that tax year. Have I overlooked something?

    • boomer on November 15, 2017 at 4:30 pm

      Hi A. Keith. No you’re not missing something. Earned income could come from rental property or royalties, for example. Yes, the contribution limit is 18% of the previous year’s income, as you say. This strategy would all depend on the dollar figures involved. The 80+ person is a theoretical extreme example.
      The point really is that a person can still contribute to a spousal RRSP even after the age of 71 if their spouse is younger than that and they have some type of earned income.

      • A. Keith on November 16, 2017 at 2:54 pm

        Hi Marie,

        I hope you can clarify further about earned income. My understanding is that both pensions and investment income (from GICs, bonds, stocks, exempt market securities) would not be considered earned income. Is that accurate? And concerning contributing to a spousal RRSP for a spouse younger than 71, it is the contributor (not the spouse) who must have the earned income for the year in question. Is that correct?

        • boomer on November 17, 2017 at 1:48 pm

          Yes, investment and pension income is not eligible. Earned income for contribution purposes includes: salary, employee profit sharing allocations, self-employment income, rental income, royalties and CPP/QPP disability payments.
          For spousal RRSPs, the contributor must have the earned income.

  6. Pellrider on November 16, 2017 at 8:44 pm

    Really liked this article. I came to know a lot about RRSP. Thanks for sharing all the different strategies

  7. Glen on November 23, 2017 at 7:07 am

    I am planning to retire at 55.i have about 150k in RRSP which i am planning to withdraw $4999 + $4999= $9998 per year. Do i have to pay tax on it and how much.

    • boomer on November 23, 2017 at 5:13 pm

      Hi Glenn. Your RRSP withdrawals are considered taxable income – how much tax you will pay depends on how much you receive in other income and which province you live in. If this will be your only source of income it will be within the federal personal exemption amount of $11,474 (2017) and you won’t pay any income tax.

      However, your financial institution will take withholding taxes when you make your RRSP withdrawal which you claim when you file your tax return.

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