It’s that time of the year when we focus on RRSP contributions, filing our tax returns and wondering how we can save more on taxes and increase what is in our pockets. What better time to talk about your RRSP carry-forward room?
When retirement time rolls around, your RRSP eligible investments may be a significant source of your income – and you can make it even more significant by understanding – and taking full advantage of – its carry-forward potential.
Available RRSP contribution room may be carried forward to future years if the deduction is not claimed on the current year’s tax return. Add a few simple strategies and you can fill that carry-forward room in ways that will pay off for you, now and later:
Make a contribution now, take part of the deduction now Use a portion your contribution for this tax year to reduce your taxable income to the next marginal tax bracket.
Make a contribution now, take the deduction later Make your maximum contribution to RRSP eligible investments in the current tax year but save the deduction for a later year when you know you’ll be in a higher tax bracket.
Take an RRSP loan to fill your carry-forward room This strategy works when the interest rate is low enough and you repay the loan as quickly as possible, preferably in one year or two at the most. You can use your tax refund to repay part of the loan.
Know your age-related options If you’re turning 71 this year and don’t have a spouse who is younger than 71, this is your last opportunity to make a contribution to your RRSP eligible investments, although any undeducted contributions can be carried-forward until the year of death. If you’re 72, have carry-forward room, and a spouse 71 or younger, you can make a contribution to a spousal RRSP eligible investment with your spouse as the annuitant.
Shelter the non-eligible portion of a severance/retiring allowance You can do this by using some or all of the allowance to fill RRSP contribution carry-forward room.
Shelter a commuted pension paid out in cash If you commute your pension and have received an excess – and taxable – amount in cash, you can use your RRSP carry-forward room to shelter at least a portion of the excess.
Decrease withholding tax When an employer makes direct contributions to your RRSP eligible investments, the employer need not apply withholding tax if the employee provides evidence that they have sufficient contribution room. The employee’s most recent Notice of Assessment from the Canadian Revenue Agency (CRA) is considered sufficient evidence of contribution room.
Make the most of your RRSP eligible investments and pay yourself forward in the most advantageous ways.
Every situation needs to be assessed individually, so if you are looking for strategies or advice, contact me for further information.
Lynne Protain, PFP, BAS, is a Consultant at Investors Group Financial Services Inc. Contact: 416-471-7400 Ext. 673 or email: firstname.lastname@example.org or LinkedIn: http://ca.linkedin.com/in/lynneprotain