Maximizing the advantages of RRSPs

Most taxpayers are familiar with the benefits of Registered Retirement Savings Plans. For those individuals that are members of a generous pension plan that will provide sufficient income to fund their lifestyle throughout retirement, RRSPs are not critical. However, many individuals are not members of employee sponsored pension plans and even those who are currently members of such a plan, have no guarantee that their future employment status will ensure they receive an adequate pension.

The goal of maximizing the size of one’s RRSP is achieved by following these four steps:

• Contribute the maximum allowable amount each year
• Start contributing at the earliest age possible
• Make the contribution at the start of the year, rather than in the 60 day period following the close of the calendar year
• Implement an appropriate investment policy for the funds contained in the RRSP

By maximizing contributions at an early age, it is possible to achieve financial planning objectives other than retirement. These include:

Home Buyers Plan – Taxpayers can borrow up to $20,000 from their RRSP to use as a down payment on a home purchase. The amounts borrowed must be repaid over a fifteen-year period. Although intended for new homebuyers, the rules allow individuals to qualify if they have not owned a home in the previous five years.

Lifelong Learning Plan – Taxpayers are allowed to withdraw up to $10,000 per year to a maximum of $20,000 to support a return to school. The student must be in full-time attendance and the program must be at least three months duration. Amounts borrowed from the RRSP must be repaid in equal installments over a ten-year period. Assuming the individual is a full-time student in a qualifying educational program, the repayments will commence in the fifth year following the withdrawal.

Financing a Maternity Leave – An individual on maternity leave will receive employment insurance benefits, plus whatever employer sponsored income and benefits may be available. If this income level is inadequate, the individual may collapse a portion of their RRSP to help fund the maternity leave. Any amount withdrawn will be taxable, but since the individual’s income may be significantly reduced during this period, it may be a tax effective strategy. Many women make the maximum RRSP contributions prior to their maternity leave with the intentions of withdrawing these funds while they are off work.

Funding a Period of Unemployment – If an individual suffers from an extended period of unemployment, an RRSP is a tax effective source of funds during this difficult time.

Miscellaneous RRSP Tips – In order to achieve the maximum advantage from an RRSP, individuals may wish to consider the following tax tips:

Children should file a tax return for every year they have earned income. Although no tax return may be required, nor any taxes payable, reporting earned income creates RRSP contribution room. These amounts can be carried forward until the child enters the workforce and has a meaningful level of income.

If an individual faces the possibility of bankruptcy, RRSPs offered by insurance companies may offer creditor protection.

Individuals are allowed a lifetime over contribution of $2,000. Use this deduction as soon as possible.

A spousal RRSP contribution is an effective income splitting strategy if the spouses expect to have different tax rates at retirement.

Individuals can carry forward unused contribution room to future years. This carry forward should be claimed in years when income levels are high. For example, students who create unused contribution room from their part-time jobs should not use the deduction until they have started full-time employment and their income levels rise accordingly.

Make your RRSP contributions at the start of the year, rather than in the 60-day period following the end of the calendar year. This effectively allows an additional contribution over an individual’s lifetime.