Most taxpayers are just thankful to have the opportunity to shelter some income in an RRSP. They usually make their once-a-year installment immediately before the last minute deadline on March 1. Then they forget about it until the next year's deadline rolls around. Of course, that is better than doing nothing, but an investment as important to your retirement plan as an RRSP deserves more hands-on management.
In time for income tax preparation season, here are some handy tips to ensure that you're maximizing your RRSP investment.
1. Use any unused RRSP deduction room by making a catch-up contribution
If you have not contributed the maximum amounts available to you in earlier years, you have room to make a catch-up contribution. This is particularly beneficial if the unused room relates to years in which your income was taxed at a lower rate than now. Any contributions made now are deductible at your higher rate of taxation.
2. Defer taking a deduction for your RRSP contribution
If your income has fallen into a lower tax bracket but is expected to rise again in the years ahead, you might want to consider deferring your RRSP contribution to future years. When you enter or re-enter a higher tax bracket you will save more in taxes.
3. Take out a loan to cover your RRSP contribution
As long as you can handle the loan payments, you're almost always better off borrowing money for your RRSP contribution. This way, you get more tax-deferred dollars growing sooner.
One word of caution, however. Since you can't deduct the interest for an RRSP loan, continuing to pay such interest over a long period may wipe out any tax benefits from your RRSP contribution.
4. Contribute funds to your spouse's RRSP
If your spouse makes less than you, either now or on retirement and won't withdraw any funds from the spousal RRSP for 3 years after your last contribution, consider contributing funds to your spouse's RRSP.
This method of income splitting lets you shelter income at your higher tax rate while your spouse's withdrawals will be taxed at a lower rate. You not only defer taxes, but avoid paying the difference between the tax rate on contribution and the tax rate on withdrawal. This may also reduce the impact of the age credit and old age security clawbacks.
Where the contributing spouse is over 69 and the receiving spouse is younger, the older spouse still qualifies for the RRSP deduction provided unused deduction room exists.
5. Make an over-contribution of $2,000 to your RRSP
After maximizing your RRSP contributions every year you can still make an over-contribution of up to $2,000. The penalties (1% per month) for contributing more than this amount would neutralize any benefit to you.
An over-contribution can't be deducted from income for tax purposes for the current tax year, but it does allow you to begin earning tax-sheltered income sooner. In effect, you're making an early deposit on your next year's contribution.
6. Contribute to your RRSP early in the new RRSP year
If you have the funds available, try to contribute to your RRSP as early as possible in the new RRSP year. Often we wait until the last minute to make our contribution. The earlier you start, the earlier your contribution begins to earn tax-free, compounding income sooner, and maximizing your RRSP's growth potential.
As with any tax plan, we recommend that you consult with your tax professional before investing.