Some Final RRSP Notes

With the RRSP deadline fast approaching, I thought that I should add a few more hints.

Contribution Room

Most taxpayers have additional contribution room available over and above the amount you earned for the current year (in this case, your 2005 current contribution room is based upon your 2004 income.) You may have not used your full available contribution room for other years so it has been collecting for you. Check you 2004 Notice of Assessment for the amount you are eligible to contribute or call the TIPS line. This service requires you to have your S.I.N., birth date and amount of income that you reported on line 150 of your 2004 income tax return.

If you look at the first article on this page, you will see how to maximize your tax deduction by reducing your higher bracket taxes. But this is not the only reason for making an RRSP contribution. If you are older, you may want to get that investment in now so it will start earning that tax free interest, dividends or capital gain. Not every strategy is right for everyone. So look over what you want to accomplish, then make you contribution

Spousal RRSP’s

One of the most underused RRSP options is the spousal RRSP. A spousal RRSP happens when your buy the RRSP in the name of your spouse. You get the tax deduction but your spouse gets the RRSP. It is most often used when one spouse is working and the other isn’t or when there is a large difference in income between the spouses.

The purpose of this type of RRSP isn’t for the present, it’s for the future. Ideally, both spouses should have the same amount in RRSPs, This is because when you both retire, it is better for both of you to have the same amount of income. Personal tax credits are worth more than credits that you can transfer from a spouse. For example, if you both have taxable income, you both get a basic personal exemption of $8,012. The amount a taxpayer can deduct when a spouse has no income, they get a credit of $7,484, a difference of $528. Remember, that will be for every taxation year. There are also many other deductions that can be used by two individual tax payers but not for one filing for both people.

Before buying a spousal RRSP, examine just how much in RRSP’s each of you have then plan a strategy for equalizing the amounts you each have. You do not have to catch up all at once if it is not advantageous for the contributor. Remember, try and use the contribution room that reduces the highest portion of the taxable income. Contributing to reduce low income does not give you a good income tax deduction. See above regarding contribution room.

Remember, spousal RRSP’s are designed for families where one wage earner is making most, if not all, of the income. If you both are making about the same wages, you should each be making your own RRSP contributions.

Borrowing For RRSP’s

RRSP loans are cheap. This is because a financial institution wants to sell you their product. This is fine, as long as you like their product. The other reason is that the loan is secure. It is backed by the investment that you are purchasing. But it’s important that you pay that loan off as soon as possible or you may use up all of the gains that you make in your RRSP. Use your tax refund to pay this loan off, if possible. Remember, RRSP interest is NOT deductible for income tax purposes.

Don’t Know What To Buy?

Sometimes, as the deadline approaches, all of you procrastinators don’t know where to invest your RRSP money. You are afraid that you may choose the wrong investment and then you are stuck with it. There is an option. Most banks offer an RRSP savings account. You can park your money in this account, get your RRSP receipt in time for the deadline, then decide where you want to put it later. One caution. Make sure that when you have the change in investment done by a transfer from the bank. Don’t just take out the cash or you will be charged income tax on the money you take out. Just have your bank transfer the money to the new investment and you won’t have a problem.

Finally!

The last point that I want to make is that you shouldn’t be rushing at the RRSP deadline in the first place. The best way to invest is by using a monthly contribution then top up your annual amount at the year end. Doing this gives you the advantage of dollar cost averaging. What this means is that you are buying into the market at an average rate...not the top or bottom...so your cost is averaged over a period of time. Talk to an RRSP representative about this. You can arrange to invest a monthly amount that you can afford, then, if you wish, top it up before the current year deadline. Check it out. You will actually make more money this way.