For most people, a registered retirement savings plan (RRSP) is a way to save for retirement and pay less income tax. True, RRSPs remain a great tool for retirement planning. But, there are some other really useful things you can do with them. Check out some of the other ways you can use your RRSP to achieve your financial goals:
1. Buy your first home with the RRSP Home Buyers’ Plan
RRSPs give first-time home buyers the ability to co-ordinate their RRSP strategy with their home purchase. What can you do under the Home Buyers’ Plan? You and your spouse can essentially each borrow up to $25,000 from your RRSP to buy your first home.
As an example, let's say Melissa wants to buy a home in five years. She's planning to save about $20,000 for a down payment by putting away $300 per month. What happens if Melissa puts that $300 per month ($3,600 per year) into an RRSP (assuming she has the contribution room)? She'll get a 36% tax savings based on her marginal tax rate. That works out to a tax refund of $1,296 per year. In five years, Melissa will have $20,000 in her RRSP to borrow for the purchase of her first home. And she'll also have an extra $6,500 from tax savings.
- RRSP home buyers plan helps first-timers
- Buying a house? here's why you need life insurance
- Buying a home: What happens after your offer is accepted
When you borrow money from your RRSP under the Home Buyers’ Plan, you must pay the money back over a 15-year period. In Melissa’s case, she has to put back $1,333.33 per year for 15 years. If she misses a payment, she must pay tax on that amount. She'll also miss out on 15 years of tax-sheltered growth on that $20,000.
Visit the Home Buyers’ Plan website for more information.
2. Go back to school with the Lifelong Learning Plan
You can also use an RRSP to fund your or your spouse’s education under the Lifelong Learning Plan. Similar to the Home Buyer’s Plan, any withdrawals for the purpose of training or education are tax free. This is, provided you use the government form RC96.
As an example, let's say Zoe takes a six-month leave of absence from work to upgrade her education. She decides to borrow the annual maximum of $10,000 for two years from her RRSP. So she'll have to pay back, a total of $20,000. She must repay her RRSP over a period of no more than 10 years ($2,000 per year). What happens if she misses an annual payment? Then that amount will be added to her income for that year and she'll be taxed at her marginal tax rate. And again, she'll miss out on the tax-sheltered growth that the $20,000 would have earned had she left it in her plan.
For more information, visit the Lifelong Learning Plan website.
3. Split your income with a spousal RRSP
Splitting income between yourself and your spouse is a great way to reduce taxes. There are two ways to accomplish this using an RRSP.
First, you can contribute to a spousal RRSP. For example, let's say Jack has an annual RRSP limit of $10,000. He can contribute that either to:
- his own personal RRSP or
- his wife, Jenna (who has a lower income).
What happens if he contributes to Jenna’s RRSP? He'll get the tax deduction at a higher rate than Jenna would by contributing to her own. When they take the money out in retirement, they can each withdraw from their own RRSPs. This will result in less tax owing overall than if Jack was to claim the full amount at his higher rate.
The other way to split RRSP income is after the age of 65. Let’s say Mark is 72 and is now starting to create income from his RRSP through a registered retirement income fund (RRIF). For those 65 years of age or older, any RRIF income is considered pension income for tax purposes. If Mark’s spouse is in a lower income bracket, Mark can reduce his income tax bill. How? By moving up to half of that income (but not the RRIF itself) to his spouse.
4. Reduce tax deductions at source
Many people who contribute to RRSPs wait until they file their tax returns to claim their RRSP tax deductions and get their refunds.
Getting that refund feels good. But, what you’re actually doing is giving the government an interest-free loan with your hard-earned money. That’s pretty generous of you.
To avoid that, you can contribute via payroll deduction to a group or workplace plan (if your employer offers one), and the necessary adjustments to the tax deducted will be made at source.
For example, let's say Sarah has an RRSP that’s not through her employer. She files a request with the Canada Revenue Agency and arranges for her employer to deduct less income tax from her paycheque. In either case, the tax refund is effectively spread out over the whole year and the tax savings – which you can reinvest – is available sooner.
- Are you paying more tax than you need to?
- How to keep more of your retirement income and pay less tax
5. Make in-kind contributions to your RRSP
Often, people contribute to their RRSPs directly with cash – but you may not be limited to cash contributions. Instead of coming up with cash or liquidating investments to make RRSP contributions, Jacob sometimes prefers to transfer bonds, mutual funds or stocks in kind or “as is” from his non-registered investment account to his RRSP, which permits in-kind contributions. (Check your RRSP rules; not all plans allow this strategy.)
What happens when you transfer an investment such as stocks or bonds into an RRSP? It’s still considered taxable. So. you may have to pay capital gains tax if the value of your investment has gone up.
But what if the value of your investments has gone down? Then keep in mind that you can't claim a capital loss for in-kind contributions to a registered plan.
6. Use the RRSP over-contribution limit
In 1995, the government reduced the one-time over-contribution limit to $2,000 from $8,000. The over-contribution limit can provide a buffer in case you make a mistake in calculating your RRSP contributions.
- Learn more about the RRSP contribution limit
Some people purposely over-contribute up to the limit to take advantage of tax-deferred growth and compounding in their RRSPs.
But what happens as you get closer to retirement and need to make withdrawals? Then, you must make sure that you eventually claim that $2,000 as part of your contribution limit to avoid double taxation.
What happens if you exceed the $2,000 buffer? You'll get a penalty of 1% per month until you withdraw the excess.
You can use any of these tactics to leverage your RRSP, or simply stick to saving for your retirement. Just remember, the key to success is to get started now, and make saving a habit.
- Are you saving enough in your RRSP? Try this RRSP calculator to find out.
- Need help getting started? An advisor can help you select a savings plan that works best for you. Find an advisor near you today.
- Should you put your money in an RRSP or a TFSA?
- Should you borrow to contribute to my RRSP?
- What will you do with your RRSP when you turn 71?