RRSP Tips

Peggy Steele

• Have you considered the need for protection from creditors? If you are self-employed and run your own business, this is an important question. If you are self-employed with the risk of bankruptcy, or in an occupation where you could be sued, you need all the protection you can get. In Ontario, RRSPs are vulnerable to creditors unless they are invested in segregated funds. These are funds offered by insurance companies. The Canadian federal government has passed legislation that would exempt a limited amount in an RRSP if you go bankrupt. If you do not file for bankruptcy, creditors could still wipe you out.

• Consider contributing to spousal RRSPs. They are an effective way to split income, save on taxes, and contribute to a spouse’s or common-law partner’s retirement.

• In order to remain tax-free, withdrawals from a spousal RRSP cannot occur for three years after the last contribution. Otherwise, the amount withdrawn will become taxable in the contributing spouse’s hands.

• If you have contribution room in your RRSP, you can make contributions to your, your spouse’s, or commonlaw partner’s RRSP. You can see how much contribution room you have on the bottom of last year’s income tax notice of assessment.

• The contributor to a spousal RRSP claims the tax deduction. The spouse, however, owns the RRSP and can make all of the investment decisions.

• Contributors over the age of 71 can contribute to a spousal RRSP as long as their spouse or partner is under age 72.

• In years when your income is low, you can defer RRSP contributions to reduce taxes to a time when your income is higher.

• The contribution limit for 2011 is 18% of income to a maximum of $22,450. However, if you did not use all of your RRSP deduction limit for the years 1991-2011, you can carry forward unused contributions to 2012. Therefore, your RRSP deduction limit for 2011 may be more than $22,450.

• RRSPs must mature by the end of the year in which you turn 71. At that point you may take the money out (and pay tax on the full amount), or convert to a registered annuity or registered retirement income fund (RRIF) That way the bulk of the investment is protected from taxes and you are only taxed on the annual withdrawals. RRIF income must be withdrawn at prescribed amounts starting from 7.38 per cent to 20 per cent by age 94.

• If your RRSP is invested in a plan like IncomePlus, you may take out the RRIF minimums without incurring penalties. IncomePlus and plans like it also guarantee an income for life regardless of how markets perform. This is in stark contrast to plans that do not have these guarantees. In a down market, the prescribed withdrawals could reduce plans to zero. This is where the IncomePlus guaranteed income for life becomes particularly appealing.

• View the IncomePlus video here:

• RRSP deadline
  The deadline for RRSP deposits for the year 2011 is Feb. 29, 2012.

Peggy Steele is an Independent Financial Broker in the Ottawa, ON region. She can be reached at 613-256-6762.