The annual 2-month RRSP “season of madness” has arrived. I made my list, checked it twice so ready-set-go.
Understanding the RRSP regime makes it easier to stickhandle your planning marathon.
This workhorse has delivered on retirements since its intro in 1957, now a 60-year old boomer.
The RRSP has transformed over the years. For example, RRSP room carry forward was introduced in 1991. RRSPs really fit two groups of investors like a glove: those without employer pension plans and the self-employed.
Some investors still shun RRSP deposits. I see three solid reasons to pursue RRSP accumulations:
- Long-term, tax-deferred investment growth.
- Future withdrawals ideally at lower tax rates.
- Contributions provide immediate tax savings.
Stay focused on how the RRSP dovetails into your total game plan. The power of tax-deferred compounding really delivers.
Your RRSP mission is three-fold:
- Keep it simple.
- Treat it as a building block.
- The journey lasts a long time.
My updated RRSP playbook summarizes these seven vital planning areas:
▶ 1.) Sample saving targets
Many families are concerned about how much they can realistically save for retirement.
Assume you begin saving at age 30, 40 or 50 and have no other retirement assets.
Here are my sample saving targets to reach $500,000 by age 65 (targets rounded):
|Annual returns to your age 65||Annual saving targets starting at:|
|Age 30||Age 40||Age 50|
Say you are age 40, you’ll need to save $10,500/year to age 65 with 5% returns.
That reduces to $5,600/year from age 30 with the same 5% annual returns.
If your aim is to accumulate $250,000, divide the above saving targets by two.
If your aim is the $1,000,000 goal, multiply the above saving targets by two.
Waiting to start your retirement saving journey is costly. Early starts allow time to recover from investing losses and/or low returns.
▶ 2.) Closing off 2016
Your 2016 RRSP limit is 18% of your 2015 “earned income,” to a maximum of $25,370.
This sum is reduced by your pension adjustment from the 2015 employment slip.
The allowable RRSP contribution room includes carry-forwards from previous years.
RRSP deposits made by March 01, 2017 can be deducted in your 2016 income tax filing.
Your 2015 CRA notice of assessment (NOA) outlines the 2016 RRSP room. Note that the allowable $2,000 overcontribution is not included in your NOA room.
Beware if your NOA indicates unused RRSP contributions at the bottom of that page.
It means you’ve made RRSP deposits that have not yet been deducted.
My table illustrates the progression of yearly RRSP limits:
|Tax Year||RRSP Limit||Earned Income Required*|
|2013||$23,820||$132,300 in 2012|
|2014||$24,270||$134,800 in 2013|
|2015||$24,930||$138,500 in 2014|
|2016||$25,370||$140,900 in 2015|
|2017||$26,010||$144,500 in 2016|
|2018||$26,230||$145,700 in 2017|
* Figures rounded
▶ 3.) Sensible RRSP strategies
A must strategy is to treat the RRSP as an integral part of your total game plan, not in isolation. Become familiar with how the RRSP fits your goals and objectives.
A retirement projection is a great starting tool. It estimates savings injections, necessary capital and investment returns for your family.
Be aware that personally owned real estate generates “net rental income” that increases RRSP room. Conversely, net rental losses decrease RRSP room.
You don’t have to make RRSP deposits every year. Unused RRSP room can be carried forward until funds are available.
You can also make the allowable RRSP deposit and elect to deduct part or all in a future year. Be careful not to double count and create an over contribution exceeding $2,000.
RRSP deposits can be made in cash or “in kind.” However, be aware of the “deemed disposition” rules for “in-kind” contributions.
Borrowing funds to catch up on RRSP deposits has other saving capacity implications.
Ideally, loan repayments should be kept to one year and the tax refund applied to it — especially if the borrower is contemplating RRSP loans for more than one year.
Furthermore, RRSP loan interest is not deductible.
▶ 4.) Spousal RRSPs
RRSP deposits can be made to your account, spousal, or combination of both.
A family can also make all deposits to one spouse and later switch to the other.
Spousal RRSPs play a key role in equalizing a family’s retirement income: especially if one spouse will be in a low, or lower, tax bracket during retirement.
The contributor deducts the spousal RRSP deposit while the recipient owns the investments. Spousal deposits are not limited to the 50% rule for pension income splitting.
One family goal is to achieve similar taxation for each spouse during retirement.
Splitting of income that qualifies for the $2,000 pension credit also helps.
▶ 5.) My RRSP investing advice
First, design and implement a broadly diversified investment plan suitable for the family needs. Coordinate your RRSP investing approach with the total portfolio.
Never place tax provisions ahead of sensible investment strategies. If investments don’t make sense without tax enhancements, look elsewhere.
Investment income earned in RRSP accounts is tax-deferred until withdrawn. All funds received from an RRSP are fully taxable, like salary.
“Location” of investments in your various accounts is an important consideration.
Some investments, like stocks, are often better owned outside the RRSP.
There is no RRSP preferential tax treatment of Canadian dividends, gains or losses.
Further, the dividend tax credit is lost as it cannot be used by the RRSP.
Where possible, interest-bearing investments are better suited for RRSPs. Be fully aware of the investing risks incurred in your RRSP.
Capital losses cannot be used inside RRSPs. Capital gains are not taxed favourably when realized in RRSPs.
▶ 6.) Plan 2017 and beyond
RRSP room is calculated based on remuneration from your previous calendar year.
Earned income of $144,500 received in 2016 provides RRSP room of $26,010 for 2017.
RRSP deposits deductible for 2016 can be made until March 01, 2017. There is no reason to wait until the last minute where funds are available.
Your 2016 Notice of Assessment will summarize 2017 RRSP room. Send form T1213 to CRA to reduce payroll taxes after your 2017 RRSP deposit is made.
Business owners and the self-employed are wise to start planning their 2017 “earned income.” Arranging 2017 remuneration of $145,700 delivers the 2018 RRSP limit of $26,230.
RRSP conversions require deposits be made by December 31, unless there is a younger spouse. Making RRSP deposits early in the year achieves higher investment growth for your retirement.
If you turn 65 in 2017, you may want to convert some of your RRSP to a RRIF before December 31st. This takes advantage of the pension income tax credit, and perhaps pension splitting with your spouse.
▶ 7.) My RRSP conversion tips
If turning age 71 during 2017, you must convert the RRSP by December 31, likely to a RRIF.
Hence, you can begin planning the RRSP conversion early in the year.
RRSP conversion choices include the noble RRIF, cashing out the RRSP and annuities.
The RRIF is most popular because it provides considerable flexibility.
The annuity route has the least income flexibility, while cashing out RRSPs has no appeal.
Investors may already have annuities via CPP, OAS, employer pensions and Social Security.
RRSP withdrawals can be made as and when required until age 71. RRSPs can also be converted in part or in full before age 71.
An election allows the minimum RRIF payments based on the age of the younger spouse.
RRIF income qualifies for the $2,000 pension income credit and pension splitting provisions.
Eligible investments for the RRIF are the same as those for the RRSP. Investment strategy need not change if it accommodates the RRIF withdrawals.
Upon death, RRSP/RRIF accounts can be passed onto the surviving spouse. After-tax estate values can be preserved for beneficiaries named in the wills.
Conversion for each family situation can be customized, year by year. You can choose withdrawals above minimums, frequency of withdrawals and investments.
In my camp, RRSPs are a vital cornerstone of the retirement/independence puzzle.
Treat yours with special care, especially if you’re near or in retirement.
For me, the venerable RRSP is not to be overlooked. I favour blending RRSP strategies with the RRIF, TFSA and cash accounts.
Think ahead about where you are headed. Then plan and deploy your game plan.
My latest RRSP playbook knows the way.
Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.