By Caroline Grimont
As March begins, Registered Retirement Savings Plan (RRSP) season is over, and everyone’s attention has shifted to taxes, and much awaited tax refunds. Earlier in February, though, the Globe and Mail argued that in fact, “RRSP Season” no longer exists, as such, as “The emphasis on January and February being our RRSP season is in the past, as investors shift away from one-time contributions toward regular, year-round investing, which can help investors avoid risks associated with market timing and maximize their time in the stock market.”
This is good news for me, as I can continue to answer some questions, I keep getting around RRSPs. I already answered a few, more time-sensitive questions, like whether you should park your investments in an RRSP or a tax free savings account (TFSA), and questions around deadlines. Today, let’s focus on some evergreen questions, the answers to which can come in handy as we make those year-round RRSP contributions.
How Do Spousal RRSPs Work?
If you have a spouse, or a common-law partner, you can open and contribute to a spousal RRSP, which can help reduce your immediate tax liability, and even our retirement savings between the couple.
Generally, the partner or spouse with the higher income is the one who opens and contributes to the spousal RRSP for the lower income partner. However, the spousal RRSP is registered under the name of the lower income earning partner – it is their plan, so they make the decisions and withdrawals, even though it is the higher income contributing partner whose taxable income gets lowered.
Remember the 3-year attribution rule though, which is that if the lower earning partner withdraws money from the spousal RRSP before 3-years, the taxation will be attributed back to the higher income contributor to the RRSP. You can find out more about spousal RRSPs, with examples, here.
Can I Withdraw Money from My RRSP?
Yes, you can, but in most cases, whatever money you withdraw is subject to tax, and must be included as income on your tax return. There are a couple of other cases in which you can withdraw funds from your RRSP. As we explained in the RRSP Vs TFSA article, for example, you can take advantage of the Home Buyers’ Plan, which allows you to withdraw up to $60,000 from your RRSP to buy or build a qualifying home for yourself or for a specified disabled person, or the Lifelong Learning Plan, which allows you to withdraw up to $10,000 in a calendar year from your RRSPs to finance full-time training or education for you or your spouse or common-law partner. Remember, though, you cannot participate in the Lifelong Learning Plan to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children.
What Happens If I Overcontribute to My RRSP?
If you overcontribute $2,000 or less, the CRA allows you to keep the funds in your RRSP without a penalty. However, according to the Canadian Government website, if you contribute more to your RRSP, or your spouse’s or common-law partner’s RRSP or SPP than your RRSP deduction limit allows, you will have an excess contribution.
“Generally, you have RRSP excess contributions if your unused RRSP, PRPP (Pooled Registered Pension Plan), and SPP (Specified Pension Plan) contributions from prior years and your current calendar year contributions are more than your RRSP deduction limit shown on your latest notice of assessment, notice of reassessment, or form T1028, your RRSP Information for 2024, plus $2,000. Also, you can only qualify for the additional $2,000 amount if you were 18 or older at any time in 2023.”
The site cautions that you will need to pay a tax of 1% per month on your unused contributions that exceed your RRSP deduction limit by more than $2,000. If you withdrew the excess amounts under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP), you may still be required to pay the 1% tax on all of your excess contributions.
What Happens If I Have Unused Contribution Room in My RRSP?
The short answer is, if you don’t contribute the full amount you are allowed in any one year, you can carry forward any unused contribution room, indefinitely. In fact, it could make sense for you, in a low-income year, to contribute to a TFSA instead, and contribute to your RRSP in a high-income year to reduce your taxable income. Speak to a tax expert to find a solution that works best for your unique situation.
What Happens to My RRSP When I Die?
As with most questions of mortality, this is a complicated one, that very much depends on your own personal situation. However, there are some commonalities of which you should be aware, even in this situation.
A deceased person’s RRSP can stay as is until the end of the year after the year of death. This means that there is no immediate rush to close an RRSP after the owner’s death. It is important to remember that taxes on an RRSP have to be paid after death – unless a spouse or common-law partner is the sole beneficiary of the RRSP. In this case, the surviving partner retains all the benefits of the RRSP, and no tax is payable at the time of transfer.
You can also designate other beneficiaries to your RRSP, such as your children or grandchildren. You can find out more here.
Can I Transfer My RRSP to Another Account?
Yes – as long as it stays within an RRSP account, and if you are under 71 years of age in the year in which you make the transfer. Remember two things, though:
- You could incur a charge for the transfer – though in some cases, the firm to which you are transferring the RRSP might cover the charge, and
- It could take anywhere from a few days to a few weeks for the transfer to complete.
What Happens to My RRSP At Age 71?
As the Canadian Government website explains, in the year you turn 71 years of age, you have to choose from one of the three following options for your RRSPs:
- Withdrawal of funds,
- Transfer of RRSP to a Registered Retirement Income Fund (RRIF,) or
- Use the funds from your RRSP to purchase an annuity.
When you withdraw funds from your RRSPs, your RRSP issuer will withhold tax, but will not withhold tax on amounts that are transferred directly to a RRIF or that are used to purchase an annuity. You may have to pay tax on the income when you start receiving payments from the RRIF, and you will need to input these payments as income on your income tax and benefit return for the year in which you receive them.
Disclaimer
For information purposes only. The content of this article is to inform and educate and therefore should not be taken as investment, tax, or financial advice. Tax investment and all other decisions should be made with guidance from a qualified professional.
