TIPS TO MAKE THE MOST OF YOUR RRSP

Ways to save, and spend, that you may not know about

It’s RRSP season. The time of year when millions of Canadians scramble to work out how much (or if) they could contribute to their Registered Retirement Savings Plan (RRSP). Many don’t know how best to exploit the savings vehicle other than park cash in it.

Here are five off-the-radar tips you can do with RRSPs to get you ahead of the savings game.

TIP 1: The Home Buyers’ Plan

First-time home buyers can tap the Home Buyers’ Plan, under which they can withdraw up to $25,000 tax-free from their RRSP to buy their first home. The amount borrowed from your RRSP under the Home Buyers’ Plan must be repaid to your RRSP over a 15-year period.

“Remember, you are benefitting by using ‘pre-tax dollars’ toward the down payment,” says Cynthia Caskey, vice-president and portfolio manager at TD Wealth Private Investment Advice in Toronto. “Even more valuable is if you can combine your RRSP contribution with other savings to have a down payment of at least 20 per cent of the purchase price and avoid (paying for) mortgage insurance.”

TIP 2: Out of cash? Consider this

If cash is tight, you can make in-kind contributions. Investors can choose to transfer stocks, bonds or mutual funds held in a nonregistered investment account to their RRSP account as an in-kind contribution.

Remember, for tax purposes, your securities will be treated as disposed of and will be subject to capital gains tax. “Check your cost base on those assets — any gain will be taxable at the time of the transfer, but a loss will not be deductible,” Caskey cautions.

TIP 3: Spousal RRSP

Spousal RRSPs are a great way to reduce overall family taxes during retirement through income splitting as a couple.

Caskey identifies situations in which a spousal RRSP has an important role to play in retirement planning:

Splitting income prior to age 65, if you do not have a registered pension plan (RPP).

Allocating more than 50 per cent of your retirement income to your partner.

Doubling Home Buyers’ Plan withdrawals. The federal government’s plan allows couples to withdraw up to $50,000 of their RRSP savings to use as a down payment on their first home.

TIP 4: RRSP excess contributions

Many savers are unaware of the cumulative lifetime overcontribution limit of $2,000 allowed by the government without incurring a tax penalty. It is designed to create a cushion in case a mistake in calculating your contributions puts you offside with the RRSP rules.

While not deductible from your current year’s income, overcontribution limit does provide a legitimate way to add extra funds to your RRSP where they can grow on a tax-deferred basis.

“Over contributions may be deducted in a subsequent year when your actual RRSP contribution is less than the maximum allowed,” Caskey says. “So if your cash flow is uneven, you may want to make the contribution while you have the cash in hand.”

Another example where you could consider using your $2,000 overcontribution is when you stop working.

“The earned income you have in your final year of employment will entitle you to an RRSP deduction in the following year,” she notes.

TIP 5: Go (or go back) to school

Funds in your RRSP can be used to finance your or your spouse’s education under the Lifelong Learning Plan (LLP), much the same way as the Home Buyer’s Plan.

As long as you, or your spouse, are enrolled on a full-time basis, you can withdraw up to $10,000 per year to a maximum of $20,000 tax-free from your RRSP. The money borrowed under LLP must be repaid to your RRSP over a period not exceeding 10 years.

It’s always a good idea to consult a financial expert to determine your suitability for the LLP.