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 each 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.
- 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
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 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 future 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 (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 program (or a part-time program, if either of you has a disability).
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 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. 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
- a spousal RRSP to which his wife, Jenna (who has a lower income) is the annuitant.*
(*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 less tax owing overall than if Jack was to claim the full amount at his higher 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 after the age of 65 or after. 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 eligible pension income that can be split 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.
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.
- The importance of joining a group pension or RRSP
- Group RRSPs: Why you need to get in on the action
- 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
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.
- 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.
- 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?
The information presented in this document is for general information only. Sun Life does not provide legal, accounting, taxation or other professional advice to advisors or their Clients. Before you act on any of the information contained in this guide, please get advice from qualified professionals. Tax and accounting professionals, along with your advisor, can thoroughly examine your situation and provide you with the best insurance and tax planning option suited to your needs.