For the most part, RRSP concepts and facts are easy to understand.
You regularly contribute to RRSP-eligible investments, the accumulating investment amounts are tax-deductible and tax-sheltered until you make withdrawals in retirement, and you enjoy the considerable benefits of compound growth over the longer term. Those RRSP facts are plain and simple but here are a few lesser-known facts that will help you get the most from your RRSP eligible investments.
The Home Buyer’s Plan allows you to borrow from investments held in your RRSP for the purchase of your first home. You and your spouse can each borrow up to $25,000 but you can only participate in the program once and you must repay investments held in your RRSP over the next 15 years or you’ll pay tax on any amounts not repaid.
The Lifelong Learning Plan makes it possible for you to use funds held within your RRSP to pay for training or education. If you qualify, you can withdraw up to $10,000 in a calendar year with the total withdrawal amount capped at $20,000 over a maximum of four consecutive years. You must repay within 10 years to avoid penalties.
If you cease to be a resident of Canada you can still make contributions to your RRSP eligible investments using only Canadian-source earned income to calculate your contribution limit. There is a 25-per-cent withholding tax for payments to non-residents from investments held within a RRSP or RRIF but you can transfer qualifying lump-sum pension benefits or retirement allowances directly into your RRSP eligible investments without paying the withholding tax.
You can also transfer funds between investments held within RRSPs without incurring a tax penalty.
In the year you turn 71 you must wind up your RRSP and take the cash, purchase an annuity or transfer the money to RRIF eligible investments, from which you will be required to withdraw annual amounts based on your age. If you are not earning much income, it might be more advantageous to start making withdrawals from your investments held within a RRSP/RRIF prior to age 71 to smooth out your taxable income in later years.
After age 71, you can no longer make contributions to RRSP eligible investments for yourself but if your spouse is under age 71, you can still make contributions on their behalf.
Knowing the facts about RRSPs and RRIFs and using the right strategies will help ensure you can realize all your retirement dreams. You can get the right RRSP (and all other financial) facts and strategies from your professional adviser.
J. Kevin Dobbelsteyn is a certified financial planner with Investors Group Financial Services Inc. His column appears every Wednesday.