Weekend Reading: RRSP Tax Tips Edition

Weekend Reading: RRSP Tax Tips Edition

The deadline to contribute to your RRSP for the 2020 tax year is just over a month away (March 1, 2021). Now is a great time to take advantage of any unused RRSP contribution room and reduce your net income (and tax burden) for 2020.

Remember, your RRSP deduction limit is determined by:

  • Your unused RRSP deduction room at the end of the preceding year, plus;
  • The lessor of 18% of your earned income in the previous year, or the annual RRSP limit ($27,230 in 2020)

When in doubt, check your CRA My Account.

I’ve already maxed out my RRSP deduction limit for 2020, but in previous years when I was catching up on unused room I’d use the first 60 days of the year to take stock of my tax situation and then make an RRSP contribution to bring any taxes owning down to zero (or close to).

Here are some other lesser known RRSP tax tips to consider:

1.) An RRSP Loan

It’s a good rule of thumb to make regular RRSP contributions throughout the year. But an RRSP loan can be useful to boost your retirement savings, catch up on available contribution room, and reduce your tax burden (particularly if you take the ‘first 60 days’ approach to maximizing your tax planning).

The basic idea is to take out an RRSP loan from your bank at interest rates that closely resemble home equity line of credit rates (2.95% – 3.95% these days), make your RRSP contribution, and then pay back the loan over a short-period of time (3-6 months) with your tax refund and other cash flow.

2.) Reduce Tax Deductions at Source

Making an RRSP contribution is simply one of the best strategies for high income earners to build retirement savings and reduce their tax burden. Managing your cash flow can be an issue, though. That’s because you don’t realize the tax savings until you file your taxes the following year. 

That’s where the form T1213 Request to Reduce Tax Deductions at Source comes into play. Fill out the form and indicate how much you plan to contribute to your RRSP this year. Submit it to the CRA along with proof –  such as a print out showing confirmation of your automatic monthly deposits. The CRA will assess the form and send you back a letter to submit to your human resources / payroll department explaining how they should calculate the amount of tax they withhold for the year.

Note that you’ll need to fill out and submit the form every year.

Reducing taxes withheld from your paycheque frees up more cash flow to make your RRSP contributions. It’s like getting your tax refund ahead of time instead of waiting until after you file.

3.) Pension Income Tax Credit

The pension income amount allows you to claim a non-refundable tax credit on up to $2,000 of eligible pension income. If you are over the age of 65 you can create your own qualified pension income to take advantage of the pension income tax credit.

What you can do is transfer a small amount – say, $12,000 – from your RRSP into a RRIF at age 65. This allows you to withdraw $2,000 from your RRIF each year for six years and claim the pension income amount. 

This Week’s Recap:

In my latest instalment of the Money Bag I answered reader questions about investing in cryptocurrency, selling stocks at a loss, and comparing your finances to others.

Speaking of investing in cryptocurrency, I shared my thoughts in this Global News piece by Erica Alini about whether Bitcoin belongs in your investment portfolio.

Over on the Young & Thrifty blog I explained how to invest in IPO stocks.

From the archives: So you’ve made your RRSP contribution. Now what?

Promo of the Week:

The message in that post from the archives is about the second step after contributing to your RRSP or TFSA account. Yes, I’m talking about actually investing the contribution.

More and more readers (and my fee-only planning clients) are choosing to self-direct their investments at Questrade. It’s not rocket-science by any means, especially if you use a single-ticket asset allocation ETF, but you still need to know how to execute a trade on the platform. Here’s how to do it using the Vanguard Balanced ETF (VBAL):

  1. Log in to your Questrade account
  2. Click on the green ‘Trade’ button at the top right of the screen
  3. Under the ‘Order Entry’ window on the right hand side, enter the ETF symbol (VBAL)

That screen will look like this:

How to execute a trade with Questrade

 

  • Look at the ‘ask’ price. You’re going to place a ‘Limit Order’ at one penny above the ‘ask’ price.
  • Now confirm the amount of money you have in cash that you want to use to make this purchase (i.e. $10,000)
  • Divide the amount of cash by the ‘Limit Order’ price. So, in the example above, it’s $10,000 divided by $28.90 = 346.02 shares.
  • Round that number down to the nearest even number, so 346 shares.
  • Enter that number where it says ‘Quantity’.
  • Confirm which account type you’re making the trade in (RRSP, TFSA).
  • Click the green ‘Buy’ button.
  • Confirm the trade.

That’s all there is to it! Open a Questrade account and you’ll get $50 in trading commission rebates (ETF purchases are free, but selling costs $4.95 per trade).

Weekend Reading:

Our friends at Credit Card Genius look at which credit card has the best return on spending in Canada.

ETF sales outpaced mutual fund sales in Canada last year ($41.5B to $31B), but in terms of total assets under management ETFs still lag far behind mutual funds.

Jim Yih at the Retire Happy blog has all the financial planning numbers you need to know for 2021.

My Own Advisor blogger Mark Seed looks at the pros and cons of taking a salary or dividends from your corporation. This is a challenge I’m still wrestling with today.

Here’s an interesting discussion on Reddit from an insider about the problems with the financial advice industry. I don’t necessarily agree with the amount of time it takes to on-board new clients, but the rest of the comment and discussion is certainly worth a read.

Michael James on Money reports his investment returns for 2020. I like that he includes the 20% of his portfolio now held in savings accounts, GICs, and short-term bonds, which obviously brings down the overall return but reflects the reality of a retiree living off his savings.

A really smart post by Millionaire Teacher Andrew Hallam on stock market solutions to irrational exuberance:

“When it comes to investing, anything can happen. Stocks will often be priced far higher than they should. But nobody can see the future. That’s why investors shouldn’t speculate. They should maintain a diversified low-cost portfolio of U.S. stocks, developed international stocks, emerging market stocks and bonds.”

Canadian Couch Potato blogger Dan Bortolotti reports the 2020 investment returns of his couch potato model portfolios.

Justin Bender, Dan’s PWL Capital partner in crime, shares the 2020 asset allocation ETF returns from Vanguard and iShares:

Rob Carrick says the epic failure of online brokers’ mishandling of call volume in 2020 could drive away their most valued clients – well-off retirees.

A Wealth of Common Sense blogger Ben Carlson looks at markets that are definitely not in a bubble, namely value stocks, emerging markets, European stocks, and Japanese stocks.

Here’s an interview with Ben Carlson on the Humble Dollar blog about his new book, Everything You Need to Know About Saving for Retirement.

Finally, why Canada should allow joint tax filing for spouses rather than taxing individuals.

Have a great weekend, everyone!

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5 Comments

  1. Darby on January 24, 2021 at 6:53 am

    Good information on RRSPs. I have a quick question – If an unsolicited RRSP withdrawal cheque is dated on Dec. 29 2020 but not received in the mail until Jan. 15 2021 does it have to be claimed in 2020 or can it be claimed as income in 2021. By unsolicited I mean we didn’t request it but it came as a settlement of a fund that was closed and cash withheld in a fraud settlement.

  2. Brad on January 24, 2021 at 7:15 am

    Wondering why you would include in your Questrade purchase description that someone place the limit price at one penny above the ask? I know its only a penny per share, but if you put the order at the ask price it is virtually assured of going through.

    Also, you may want to suggest to your readers that they refresh the bid and ask prices before setting the limit price for their order. Your screen shot shows a 15 minute lag (which I find is the standard using Questrade when first pulling up a quote), however, by simply refreshing the quote you get near real time pricing which very often changes what is shown in the bid/ask. Lots of price discrepancy can happen in 15 minutes.

    Thanks!

    • Robb Engen on January 24, 2021 at 10:06 am

      Hi Brad, I’ve got into the habit of always placing a limit order at a penny or two above the ask price, and only during trading hours (when markets are open).

      Note this doesn’t mean I’m paying more – my ‘marketable limit order’ is likely to go through immediately at the same price as a market order.

      If you place a limit order at the ask price or below there is a chance the order won’t be filled, at least not immediately.

      Your point about refreshing the bid/ask price is a good one. Thanks for mentioning that.

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