In order to provide you with an additional gimmick for investing the mortgage to an RRSP, here are some of the unheard tips and tricks you must consider:
As the RRSP deadline draws near, Rhys Kesselman,inventor of Canada’s tax sheltered saving plans mentions that there is proof that these kinds of schemes have not successfully motivated the masses about stashing accurately and he alerts that certain changes are afoot.
Kesselman says, “A lot of it is tax reduction without necessarily significant — in the aggregate — additional saving.”
With only 3 weeks of RRSP season remaining, contributions need to be made by March 01, 2018 midnight deadline, in order to be eligible for claim deductions on the 2017 tax return.
Should I even bother with RRSPs?
Although if you have a good pension at work, you can certainly contribute less to your RRSP than someone without one and with no pension, you can contribute up to 18% of your income to an RRSP each year. If you have a private pension, then the amount you are allowed to contribute to your RRSP will be reduced, to reflect the fact that you are also contributing to your retirement income through your pension at work.
Here are some points when you should not buy RRSPs;
- In case you are in the lowest tax bracket (roughly income under $45,000, depending on your province of residence), then you are more likely to be saving it for retirement using an RRSP.
- In case your tax rate is similar to the year of the contribution that it was in the year of withdrawal, then an RRSP adequately gives a comprehensive tax-free rate of return on your total contribution.
- If your tax rate is depreciated in the year of withdrawal, you will get an even higher after-tax rate of return on your RRSP investment.
And even if your tax rate is greater in the year of withdrawal, you are likely to expect better off with an RRSP than non-registered investments due to the long-term compounding that is effectively tax-free.
Whereas, for those who are presently in the last tax bracket, the tax bracket could only remain same or be higher in retirement, making a TFSA the greater choice than an RRSP, especially if you face an income-test claw back (repayment) of tax credits or government benefits.
Are spousal RRSPs still relevantly given so we can split pension via a RRIF?
Pension Income Splitting
Effective with the 2007 tax year, up to 50% of pension income can be split with a spouse or common law partner. To qualify, the pension income received one must be eligible for the pension income tax credit.
Those who are 65 years or older, pension income includes annuity payments from an RRSP and DPSP, life annuity payments from a super pension plan as well as payments from RRIF and certain regular annuities.
And for those under that age of 65 the pension income only includes:
- Life annuity payment from a superannuation pension plan.
- Payments from a RRIF that is received as the consequence of the death of a spouse or common law partner.
- Annuity payments from an RRSP or from a DPSP that is received as the consequence of the death of a spouse or common law partner.Therefore if you are under age 65, your pension splitting options are limited.
But, even without a spousal RRSP, you have the option of splitting pension income, which is defined to include RRIF withdrawals after age 65, with your spouse or partner. So, why bother with a spousal RRSP?
For two reasons: first of all, spousal RRSPs allow an individual to split more than 50 per cent of your pension income. With a spousal RRSP, one could theoretically “split” up to 100 per cent of RRSP or RRIF income with a lower-income spouse as all the withdrawals would generally be taxed in the hands of the withdrawing spouse.
Secondly, if an individual is under 65, you can’t income split RRIF withdrawals. On the other hand, if you had a spousal RRSP, the owner spouse can generally withdraw the funds prior to age 65 and have such withdrawals taxed in the hands of that lower-income spouse.
Why Spousal RRSPs Are Still Relevant
Here are some of the reasons why spousal RRSP are still relevant;
- In case you decide to retire before age 65, you and your spouse can draw on your RRSPs equally and achieve the same result as pension splitting. Both withdrawals will be taxed at the same rate.
- Pension splitting may impact your entitlement to Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).
- If you are no longer able to contribute to your own RRSP because you are over age 71, you can still contribute to a spousal RRSP.