By Chad Fraser
Ready for RRSP season? Here are some expert tips on what not to do with your RRSPs.
Before the deadline, are you thinking about contributing to a Registered Retirement Savings Plan (RRSP)?
Don’t forget to circle March 1, 2021, on your calendar! This is your last chance to contribute that will reduce your taxable income. This is also your last chance to reduce your tax payable (calculated based on the previous tax year).
RRSP Guide 2021: answers to your questions
And that’s just one of the many benefits of RRSPs.
Want another one? Tax deferral. The money in your RRSP grows tax-free until you withdraw it.
Sounds simple, right? Yet, people still make mistakes with their RRSPs. Fortunately, there are ways to avoid them or fix them before they cause too much damage. Cliff Steele, CFP Professional at Sun Life1, tells you to avoid the five most common RRSP mistakes.
Mistake #5: Misunderstanding the rules of succession
Another common mistake is that people name an adult child as the beneficiary of their RRSP when they have a living spouse.
“People often do not know that if they die, the money accumulated in their RRSP is transferred tax-free to [the RRSP of] their spouse. But if they have named an [adult, non-dependent] child or another person who is not a qualifying spouse, that money is added to that person’s taxable income,” Steele says.
2 Estate Planning Myths You Should Know
What if you don’t have a living spouse and leave your RRSP to your estate? Alas, you won’t be able to avoid taxes either. In the year of your death, the CRA will add to your income the fair market value of the investments in your RRSP. Your estate could receive a hefty tax bill, not to mention that the value of the estate for your heirs could decrease. However, this tax can be deferred (i.e. not paid immediately) if, on your death, you have:
a financially dependent child or grandchild under the age of 18;
Regardless of age, a child or grandchild with a physical or mental disability is economically dependent on you.
But Steele says that’s no reason not to use RRSPs. The key is to see it as a tool to support yourself in retirement, not as a legacy to pass on.
“I always tell people that the idea is to plan their retirement carefully and then, according to their needs, slowly withdraw their money from their RRSP. Then, they can convert their RRSP into an RRIF, from which they will use the money little by little. ยป
What will you do with your RRSP when you turn 71?
Remember: the deadline to contribute to your RRSP for 2020 is March 1, 2021. The CRA allows contributions for the previous tax year up to 60 days after the end of the year. If you’re not already contributing to an RRSP, consider doing so to start saving for your retirement.
Need help? An advisor can help you open your RRSP. It is now possible to consult most advisors by videoconference. Find an advisor near you.
