Outlined below are three planning opportunities that may allow you to maximize the use of your RRIF:
Turning 71 years of age
If you will be turning 71 this year, you only have until the end of the year to make your final RRSP contribution. The deadline that applies to most other RRSP contributors (60 days after year-end) does not apply to you.
In some cases, it may make sense for those that are 71 to over-contribute to their RRSP before the end of the year and prior to transferring the RRSP to a RRIF. The first $2,000 of over-contribution has no penalty and, provided that you have earned income in the current year which would generate contribution room in subsequent year, you would be able to deduct the contribution in the following tax year. You would still be subject to the 1% penalty tax and would be required to complete CRA form T1-OVP to report the over-contribution. The 1% penalty tax would apply for only one month, however, if the contribution was made in December.
Over age 71
If you are over 71 and no longer eligible to contribute to your own RRSP but still have available RRSP contribution room, you may have another option. If you have a spouse that is 71 or younger, you may be able to decrease taxable income by contributing to a spousal RRSP. This option is available until the end of the year that the younger spouse turns 71.
Age 71 or under
Although initiating income from your RRSP is not a requirement until age 72, those that are age 65 or older and do not receive income from an employer pension plan may wish to consider transferring some of their RRSP to a RRIF. By transferring enough to initiate a $2,000 RRIF withdrawal each year, a corresponding pension income credit will be generated. This tax credit will offset some, if not all, of the tax payable on the $2,000 of income.
This strategy is not for everyone. The payments will increase an individual’s income level and may affect your Old Age Security (OAS) and other government benefits. If this strategy is implemented, it is recommended that the $2,000 RRIF payment be transferred in-kind to a Tax Free Savings Account (TFSA) to continue its tax-efficient growth. Ultimately, you need to be aware of the consequences to your retirement savings if the payments are spent rather than reinvested.
Speak with an ATB financial advisor to get assistance with your RRIF.
The information provided in this article is a simplified general summary and is not intended to replace or serve as a substitute for professional advice. Professional tax advice should always be obtained when dealing with taxation issues as each individual’s situation is different. This information has been obtained from sources believed to be reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. This information is subject to change and ATB Securities Inc. (Member Investment Industry Regulatory Organization of Canada and Canadian Investor Protection Fund), ATB Investment Management Inc. and ATB Insurance Advisors Inc. reserves the right to change the information without prior notice, and does not undertake to provide updated information should a change occur. ATB Financial, ATB Investment Management Inc., ATB Securities Inc. and ATB Insurance Advisors Inc. do not accept any liability whatsoever for any losses arising from the use of this document or its contents.