Try to stay awake. This post is about RRSPs. And this week is your last chance.
Hopefully you already know a contribution has to be made by Wednesday to apply to your 2016 taxes. Up to 18% of what you earned, to a max of $25,370, can be chunked in then deducted from taxable income. The more you earn, the more an RRSP benefits you. Don’t tell Justin.
So RRSPs have dropped in popularity recently for two reasons. The TFSA is apparently sexier since all withdrawals are taxless. And (mostly) real estate has sucked off so much family cash flow that saving for retirement has taken a back seat to the conspicuous display of wealth called a house. Lots of people will regret this, but life’s all about choices.
Well RRSPs are still cool, shifting taxes around during your life as well saving for the future in a far more aggressive way than with a TFSA. Just make sure you put the right stuff inside – a nice collection of ETFs plus the fixed-income portion of your balanced portfolio.
Here are four of this pathetic blog’s fav ways to use the registered retirement savings plan.
Move assets and flip the refund
Actual money is not required to contribute to an RRSP or to reduce your tax bill. The rules allow almost any financial asset you might already own to be used for a ‘contribution in kind.’ That could be anything from a GIC to a junior gold mining stock. So if you already have some non-registered investments, move them into your RRSP and the government will send you money for selling yourself stuff you already owned. Take that refund and put it into your TFSA. Rub tummy.
How to profit from having a baby
Seriously. You might as well get some value out of the kid right off the bat, like reducing the overall family tax bill through income-splitting. If you and your squeeze earn different levels of income, then a spousal plan’s probably for you. Contribute to your partner’s plan up to your own limit and still claim it all as a deduction from your income. If the money’s left untouched in the spousal plan for three years it becomes the property of the other person who’s in the lower tax bracket. So now you know when to get pregnant! Take the money out of the spousal plan during a maternity leave and it’ll finance that year with the kid at little or no tax – while the contributing partner already got the big deduction. You can name him Dodger.
Save that room for the big event
Regular readers will know why it makes sense to commute a pension if you get the chance. By taking a lump sum payment instead of monthly cheques you gain control of your own retirement capital, reducing the risk of your plan going bust or squeezing benefits when you’re a geezer. You can probably pay less tax by controlling your annual income. There’s a good chance you can achieve better returns than the guys running the pension. And if you croak (happens) your family, spouse, girlfriend (or both) can get the money instead of having it fall back into the plan. Typically a commuted pension comes in an amount that’s protected inside a shelter and a hunk that’s added to your taxable income in the year you receive it. Bummer. But if you save up RRSP room for a few years prior to the big event, it can be used to effectively offset Ottawa’s hit on the cash portion.
Refunds are for losers. Do this instead.
So you make an RRSP contribution for 2016 by Wednesday, then receive a big refund cheque in April or May for having done so. You feel brilliant. But you’re not. It means you overpaid on your taxes and the government got to use your money for a full year. So, there’s a better way. Contribute monthly, and get a refund on every paycheque. It’s simple – arrange to make those regular contributions through your bank or advisor, then go to the CRA website and download Form T1213. Fill it out, attach a copy of the RRSP contribution document and send it to the Client Service Division of the local tax office. The CRA dudes will review it, send you a response and notify your employer of the amount your taxes can be reduced on each paycheque. If you live in Quebec, where everything takes longer, you also need to tell the Ministère du Revenu. The extra money you get as income can be used to top up your TFSA or, of course, buy dog food.
Or, you can just pay all your taxes, and feel good that you made up for Kevin O’Leary.