Emmanuelle Bertrand | Journalist
Updated January 10 2019
As the March 1st deadline approaches, RRSPs are on many people's minds. Even if you know what they are, you might not fully understand how they work.
Here are 8 of the most common questions our financial planners get about RRSPs this time of year.
1. If I make a contribution on behalf of my spouse, will I still get a tax refund?
By contributing to an RRSP on behalf of your spouse, depending on your contribution room, you'll get a tax deduction, and the amounts paid into the RRSP will belong to your spouse. That means your spouse is the one who will be taxed on the amount withdrawn. You can balance out your joint retirement income, and pay a lower tax rate when you make withdrawals from the RRSP.
2. One way or another, I'll still pay taxes, so why should I contribute to an RRSP? Now or later--what difference does it make?
The main advantage of an RRSP is that it lets you defer taxes. When you contribute to your RRSP, you enjoy tax benefits when your income is generally highest. When you retire, your tax rate should be lower, so you'll pay less tax than the deduction you received. And what's more, the money you invested will grow tax-free until you take it out.
3. Now that you can split pension income in retirement, is it really worth it to contribute to my spouse's RRSP if they earn less?
Yes. Income splitting* is only allowed starting at age 65 even if you receive annuities before then. The amount transferred to your spouse cannot exceed 50% of all of your retirement income. So, before age 65, a spousal RRSP is still a good strategy if you expect that your spouse's retirement income will be less than yours.
*Income splitting before age 65 is allowed at the federal level (it was eliminated in Quebec in 2014), but only for life annuity income from a pension plan and for certain payments received after a spouse's or common-law partner's death.
4. Can I make RRSP contributions even if I'm not working?
To make RRSP contributions, you need to have accumulated contribution room. Every year, you accumulate contribution room of 18% of your earnings for the previous year. This contribution room can be carried over and deducted in future years, even the years you didn't work. But if you earn less than $25,000 a year, you won't benefit from the RRSP's tax deferral power.
You could invest in a tax-free savings account (TFSA). You won't be entitled to any deductions when you contribute, but it will generate tax-free income. TFSAs are available to any Canadian age 18 or older, regardless of whether or not they earn work or retirement income and even if they have no income. You can contribute $6,000 a year, and the cumulative limit since 2009 is $63,500.
5. Since interest rates are so low, is it really worth it to open an RRSP?
RRSPs aren't exactly an investment. They're like a basket in which you make contributions that provide tax deductions. And you can grow that money by choosing different investment vehicles, like GICs, mutual funds or equities, depending on your risk tolerance and your investment objectives.
RRSP or TFSA?
6. Is it better to contribute to an RRSP or to a TFSA?
The advantage of TFSAs and RRSPs is that they allow you to save money tax-free. Also, the 2 plans complement each other because they meet different types of needs.
7. Is it true that if you withdraw money from your RRSP, you lose your old age pension?
You could. The money you withdraw from an RRSP counts as income for the year. In 2019, your total annual income has to be $125,696 or more to lose your old age security (OAS) pension completely. You start to lose a portion of your OAS pension if your personal income is higher than $77,580.
8. What happens when I take out the money? What's the financial impact?
With RRSPs, you don't pay any taxes until you make withdrawals. Generally, your income will be lower than when you made the contributions, and so your tax rate will be lower. The money you withdraw from an RRSP counts as income in the year of the withdrawal. You'll pay minimum taxes deducted at source, but it might not be based on your tax bracket. You may have additional taxes to pay when you file your taxes. A good payout strategy will help you plan when and how much to withdraw from your RRSPs so you can reduce your tax bill.
Thank you to investment and retirement advisor Anik Lafrance, financial planner Jacques Philipppe and personal finance advisor Sabah Boumane at Caisse Desjardins Trillium for contributing to this article.
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