SEPTEMBER 20, 2021
By Jim Yih and Sun Life Staff
Read time: 6 minutes
For most people, a registered retirement savings plan (RRSP) is a way to both:
True, RRSPs are a great tool for retirement planning. But there are some other useful things you can do with them.
Will you be a first-time home buyer? You can use your RRSP to help buy your first house.
What can you do under the Home Buyers’ Plan? You (and your spouse if you have one) can borrow up to $35,000 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 30% tax savings based on her marginal tax rate. That works out to a tax refund of $1,080 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 $6,000 from tax savings.
What happens when you borrow money from your RRSP under the Home Buyers’ Plan? You must pay the money back to your RRSP over a 15-year period.
In Melissa’s case, she must put back $1,333.33 per year for 15 years. She will miss out on future tax-sheltered growth on that $20,000. So, if Melissa has money in a non-registered account, she may want to use that first.
Visit the Home Buyers’ Plan website for more information.
You can also use an RRSP to fund your or your spouse’s education under the Lifelong Learning Plan (LLP).
How does the RRSP LLP work? The LLP lets you withdraw up to $10,000 per year to a maximum of $20,000 tax-free from your RRSP. You or your spouse can then use that money to pay for a full-time education program. Or, you can use it for a part-time program, if either of you has a disability.
Like 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 decides to upgrade her education and study full-time for two years. 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. Again, she'll miss out on earning tax-sheltered growth had she left it in her plan.
For more information, visit the Lifelong Learning Plan website.
Splitting RRSP income with 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:
(*An annuitant is someone who’s entitled to collect regular payments of an investment or pension.)
What happens if he contributes to a spousal 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 Jack owing less tax overall. This is compared to if he claimed the full amount at his higher tax rate.
What’s more, Jenna will need to wait three years before withdrawing from the spousal RRSP. If she doesn’t, then Jack will have to pay tax on the withdrawals instead of Jenna.
The other way to split RRSP income is at the age of 65 or after. Let’s say Mark is 72. He’s starting to create income from his RRSP through a registered retirement income fund (RRIF) now. For those 65 years of age or older, the government considers any RRIF income eligible pension income. And you can split the income between spouses.
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.
Many people 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 doing is giving the government an interest-free loan with your hard-earned money.
How can you avoid that? By contributing via payroll deduction to a group or workplace plan (if your employer offers one). That way they’ll make the necessary adjustments and deduct the taxes at the source. Otherwise, consider filing a T1213 Request to Reduce Tax Deductions at Source.
Often, people contribute to their RRSPs directly with cash. But cash contributions are not your only option.
For example, Jacob sometimes transfers bonds, mutual funds or stocks in kind (or “as is”) from his non-registered investment account to his RRSP. (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. When making an in-kind contribution to an RRSP, it’s possible for capital gains to be realized (even if the shares are transferred directly). Even though you haven’t sold the shares on the market, Canadian tax rules dictate that a “deemed disposition at fair market value” has occurred. 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.
There’s a one-time over-contribution limit of $2,000. The over-contribution limit can provide a buffer in case you make a mistake in calculating your RRSP contributions.
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 make the most of your RRSP. Or simply stick to saving for your retirement. Just remember, the key to success is to get started and make saving a habit.
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation