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Squeeze the Most Out of Your RRSP

Most taxpayers are thankful to just having the opportunity to shelter some income in an RRSP. They usually make their once-a-year installment – immediately before the last minute deadline on March 1. Then they forget about it until the next year’s deadline rolls around. That’s way better than doing nothing, but an investment as important as an RRSP deserves more hands-on management.

 Actions  Conditions Benefit 
 Use any unused RRSP deduction room by making a catch-up contribution  If you have not contributed the maximum amounts available to you in earlier years  Particularly beneficial if the unused room relates to years in which your income was taxed at a lower rate than now. Any contributions made now are deductible at your higher rate of taxation.
 Defer taking a deduction for your RRSP contribution  If your income has fallen into a lower tax bracket but is expected to rise again in the years ahead  Delaying your deduction claim until you enter or re-enter a higher tax bracket will save more in taxes.
 Take out a loan to cover your RRSP contribution and/or catch-up contribution  As long as you can handle the loan payments, you are almost always better off borrowing your RRSP  This way, you get more tax-deferred dollars growing sooner. Since you cannot deduct the interest for an RRSP loan, continuing to pay such interest over a long period may wipe out any tax benefits from your RRSP contribution.
 Contribute funds to your spouse’s RRSP  If your spouse makes less than you, either now or on retirement and will not withdraw any funds from the spousal RRSP for 3 years after your last contribution  This method of income splitting lets you shelter income at your higher tax rate while your spouse’s withdrawals will be taxed at a lower rate. You not only defer taxes, but avoid paying the difference between the tax rate on contribution and the tax rate on withdrawal. This may also reduce the impact of the age credit and old age security clawbacks. Where the contributing spouse is over 69 and the receiving spouse is younger, the older spouse still qualifies for the RRSP deduction provided unused deduction room exists.
 Make an over-contribution of $2,000 to your RRSP  After maximizing your RRSP contributions every year you can still make an over-contribution; of up to $2,000. The penalties (1% per month) for contributing more than this amount would neutralize any benefit to you.  An over-contribution cannot be deducted from income for tax purposes for the current tax year, it does allow you to begin earning tax-sheltered income sooner. In effect, you are making an early deposit on your next year’s contribution.
 Contribute to your RRSP as early as possible in the new RRSP year (instead of the following February) and maximize your contributions  If you have the funds available  Your contribution begins to earn tax-free, compounding income sooner, maximizing your RRSP’s growth potential.