RRSP
RRSP – It’s time to get serious in 2014
You’ve just finished taking care of your RRSP needs for the 2013 tax year. Hence, this is a great time to pay serious attention to your RRSP matters for 2014. One major goal is to make that portion of the nest egg last to age 90, or longer, for both spouses.
The venerable RRSP was introduced in 1957 as a $1,500 contribution. Since then, it has slowly and methodically developed into the primary foundation for family retirement plans.
Leading edge boomers are particularly attached to RRSPs.
The self-employed too use the RRSP as the most important substitute for the lack of employer pension plans. Individual RRSP account values often exceed $500,000. Of course, someone has to coordinate and steward the investments for the lifetime of the spouses.
Three sound reasons to encourage and pursue RRSP accumulations stand out:
- Long-term, tax deferred investment growth.
- Future income withdrawals, ideally at lower income tax rates.
- Deductions provide current income tax savings.
Get serious in 2014 about how the RRSP fits into your total plan. You will agree that there is much to synchronize all at once. Understanding the RRSP regime makes it easier to plan and coordinate your particular retirement marathon. This methodology works best:
- Reflect on what you need to accomplish for your retirement.
- Figure out what’s in your best interests before you take any action.
Here is my four-prong approach.
1. Your 2014 RRSP Limit
Your 2014 RRSP limit is 18% of your 2013 “earned income”, to a maximum of $24,270. This amount is reduced by your pension adjustment from your 2013 employment slip. Your past service contributions may also affect it.
Earned income for most people consists primarily of employer salary. It can also include income such as bonuses, commissions, business, professional, farming, along with net rental income. Note that rental losses reduce earned income; hence, the RRSP deposit.
Maximum 2014 RRSP entitlement is reached with earned income of $134,800 in 2013. RRSP deposits must be made by March 01, 2015 to be deducted in your 2014 income tax filing.
Your allowable RRSP contribution room includes carry-forward amounts from previous years. A 1% monthly penalty applies to RRSP deposits that exceed allowable limits.
The CRA notice of assessment (NOA) from your 2013 tax filing calculates your 2014 RRSP room. Note that the allowable $2,000 over contribution amount is not included in your NOA room. Be careful if your NOA indicates you have unused RRSP contributions at bottom of that page. It usually means you’ve made some RRSP deposits that have not yet been deducted.
This table illustrates the progression of annual RRSP limits:
|
Tax Year |
RRSP Limit |
Earned Income Required* |
|
2011 |
$22,450 |
$124,700 in 2010 |
|
2012 |
$22,970 |
$127,600 in 2011 |
|
2013 |
$23,820 |
$132,300 in 2012 |
|
2014 |
$24,270 |
$134,800 in 2013 |
|
2015 |
$24,930 |
$138,500 in 2014 |
* Figures rounded.
2. Sensible RRSP Strategies
A key strategy is to treat the RRSP as an integral part of your total game plan, not in isolation. Pay special attention to how the RRSP fits with your goals and objectives. A retirement projection is a good tool to start with. It estimates required savings injections, necessary capital and investment returns for your specific situation.
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 can play a key part in equalizing a family’s retirement income. Especially, if one spouse will be in a low, or lower, income tax bracket during retirement.
One family goal is to achieve similar taxation for each spouse during retirement. Splitting of income that qualifies for the $2,000 pension income deduction also helps. The income split is an allocation decision that can be changed annually to suit your needs. The decision is made at income tax filing time.
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. Deposits can be made in cash or “in kind”. However, be aware of the “deemed” disposition rules for “in-kind” contributions.
3. Our Sage RRSP Advice
First, design and follow a well diversified investment plan suitable for you. Coordinate your RRSP investing approach with the rest of your portfolio. Location of investments in your various accounts is an important consideration. Some investments, like equities, may make more sense outside the RRSP.
Never place income tax provisions ahead of sensible investment strategies. If investments don’t make sense without tax considerations, look elsewhere. Be fully aware of the investment risks incurred within your RRSP. Remember that capital losses can’t be used inside RRSPs.
Capital gains are not taxed favourably in RRSPs as they are personally. Everything withdrawn from RRSPs is fully taxed as income. Understand the investments currently owned and being considered. Resist rushing into buying something if you’re not comfortable.
If you borrow, the interest paid on RRSP loans is not deductible. It’s wise to repay RRSP loans quickly, preferably within one year. Your tax refunds help.
4. Jump Start Your 2014 RRSP
RRSP contributions for 2014 can be made until March 01, 2015. There is no reason to wait to the last minute where funds are available. Your 2013 NOA will outline 2014 RRSP room. Form T1213 can be sent to CRA to reduce payroll taxes after your 2014 RRSP deposit is made.
Business owners and self-employed should start planning their 2014 “earned income”. Revisiting the 2014 remuneration composition helps the process. Business owners may also asses whether the Individual Pension Plan (IPP) suits better than the RRSP. The pros and cons of IPPs have to be weighed for each case.
If turning age 71 during 2014, you are subject to the rules converting the RRSP by December 31, likely to a RRIF. Hence, you can begin planning the RRSP conversion. Such conversions require all RRSP deposits to be made by December 31, 2014 unless there is a younger spouse. Lastly, making RRSP deposits early in the year achieves higher investment growth for your retirement.
