Koroll & Company Blog

We often discuss the benefits of Tax-free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs), as both tax planning and retirement saving tools.

RRSPs allow us to save for the future while delaying the payment of income taxes until withdrawals are taken from our RRSPs. This in turn, means that we are able to reduce our taxable income in the year that our contributions are made, by the amount that we contribute to our RRSPS, lowering our tax liabilities for the year.

Once you deposit income into your RRSP, you can choose to invest in mutual funds, stocks, bonds, etc., to further grow your savings. It will not be until you withdraw income from your RRSP, that you will be liable for taxes on that income, including any income earned from investments.

TFSAs also provide tax benefits and saving opportunities for Canadians. Like an RRSP, they can contain cash and/or investments. Unlike RRSPs, however, we must pay taxes on the income contributed to a TFSA, assuming it came from a source of taxable income, such as employment, commissions, business, or a rental unit, etc. Instead, TFSAs allow us to earn investment income, including capital gains and dividends, without paying taxes on that income, in most cases.

Unlike other tax planning strategies, such as charitable donations and the timing of medical expenses, the timing of RRSP and TFSA contributions is more flexible. RRSP contributions can be made until March 1^st of the following year and there is no deadline for making a TFSA contribution.

As such, RRSPs and TFSAs are not top of mind come year-end tax planning. But, failing to consider these two tools as the end of the year approaches, can have adverse effects on some taxpayers.

RRSPs for Those Who Turned 71 This Year

We 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 an Registers Retirement Income Fund (RRIF), an annuity or cash. (It is important to note that withdrawing your RRSP as cash, in one lump sum, can lead to substantial tax liability.)

As such, if you turned 71 this year (or will be turning 71 by December 31^st), you will not be able to take advantage of the 60-day extended contribution window after December 31^st. Therefore, if you are 71 this year, you need to make your contributions before year-end.

Making Spousal RRSP Contributions

Another benefit of RRSPs in that you can make contributions in your spouse’s name and deduct the contribution on your own tax return, reducing your current year taxable income. When the money is withdrawn by your spouse, the amounts are taxed on your spouse’s return, hopefully at a lower rate. This can be a great tool for families with a spouse in a higher income tax bracket.

One of the biggest stipulations, however, is that unlike personal contributions, contributions made on behalf of a spouse will only be applied to their return if they are withdrawn no sooner than the end of the second calendar year after the contributions were made.

Example:

If you made a contribution on behalf of your spouse in 2017, a withdrawal would only be taxable in their hands if they withdraw the funds no earlier that January 1, 2020. If you wait until the 60-day contribution widow, ending March 1 of 2018, you will have to wait until 2021.

Taking advantage of this tax strategy is important for unexpected withdrawals on rainy days or for anybody planning to withdraw contributions made on behalf of their spouse in the near future, as the funds can be withdrawn a full calendar year sooner.

Plan TFSA Withdrawals Strategically

While TFSAs have no contribution deadline, taxpayers are limited by a maximum contribution. For 2017 this max was $5,500 plus any previously contributed amounts, which were withdrawn in 2016.

Example:

If you withdrew $2,000 worth of contribution in 2016, your maximum contribution for 2017 is $7,500.

Maximum Contribution = $2,000 + $5,500 = $7,500

If you are planning to make a withdrawal in the coming months, whether it is to make an RRSP contribution, renovate your home or go on vacation, withdrawing the funds before December 31^st will allow you to re-contribute the withdrawn amounts as soon as 2018, instead of waiting until 2019.

This is an excellent tax planning strategy for taxpayers who want to optimize the income earned on TFSA investments.

For more information on tax planning with RRSPs and TFSAs before year-end, and after, contact us today. We look forward to discussing how these strategies, and others, can help you optimize your unique situation.