Registered Retirement Savings Plans (RRSPs) let you contribute to your savings while benefiting from tax deferral.
This is because any contributions you make to your RRSP are deducted from your taxable income in the year that they are made. Any amount withdrawn at a future date, including interest income earned on investments, will be taxed at that year’s applicable rate.
Most taxpayers will wait until retirement, when they have less income coming in, to withdraw from their RRSP. This is because their tax rate is usually lower.
RRSP contributions for 2021
The deadline for making RRSP contributions for 2021 is Tuesday, March 1, 2022. The maximum amount that you can contribute for the year is the lesser of $27,830 and 18 percent of your 2020 earned income. Because the contribution room is carried forward indefinitely, you may also contribute amounts equal to any unused contribution room from previous years.
In addition, you can also contribute to a spousal RRSP and deduct it from your income, however, any amount contributed will reduce your total contribution room and not your spouse’s.
When the money is withdrawn by your spouse, the amounts are taxed on your spouse’s return. The intent being that your spouse has a lower income and will therefore be able to withdraw the amount at a lower rate. This can be a great tool for families who have a spouse in a higher income tax bracket.
There are, however, some rules specific to spousal RRSP contributions that need to be considered. Specifically, withdrawals of spousal contributions will only be taxed at your spouse’s rate if they’re withdrawn no sooner than the end of the second calendar year after the contributions were made.
For example, if you contribute on behalf of your spouse on or before March 1, 2022, a withdrawal would only be taxable in their hands if they withdraw the funds no earlier than January 1, 2025. If they withdraw it any earlier, it will be taxed in your hands.
There is, however, one instance when taxpayers cannot benefit from RRSP contributions from January 1 to March 1 and that is if the taxpayer turned 71 in 2021.
RRSPs for those who turned 71 this year
Canadians are able to make contributions to our RRSPs until the end of the year in which we turn 71. Once that year is over, the RRSP must be collapsed into either a Registered Retirement Income Fund (RRIF), an annuity or cash.
If you turned 71 in 2021, you will not be able to take advantage of the 60-day extended contribution window from January 1 to March 1, 2022 to contribute to your own RRSP. You will, however, be able to contribute to your spouse's RRSP so long as they did not turn 71 in 2021.
For assistance with your RRSP or tax planning, please contact Koroll and Company today. Our team of chartered professional accountants are ready to help.
