FP Answers: When’s the best time to make my last RRSP contribution?


Should this reader make the last contribution to an RRSP now? Or save it for some time in future after retiring?

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By Julie Cazzin, with Andrew Dobson

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Q : This is the last year I can contribute to a registered retirement savings plan (RRSP) before rolling into a registered retirement income fund (RRIF). Should I contribute one last time to save paying the government about $10,000 in tax? It feels strange to lock in money when I’m so close to forced withdrawals. I have read you can make the contribution and then save it for a future year. How does that work? Will it save me tax? And how do I know if this is a better option for me than contributing to the RRSP right now? I work in human resources, love my job and intend to keep working until age 75, so five more years. — Antoinette

FP Answers : One of the benefits of RRSPs is you can use contributions and withdrawals to try to plan your income for the current year and future years so you can minimize your lifetime tax. If you turn 71 this year, you can contribute up to Dec. 31 and required withdrawals will begin next year after you convert your RRSP to a RRIF. There are some things to consider when deciding whether to contribute one last time.

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Although you must claim an RRSP contribution in the year it is made, you can carry forward the deduction to use in a future year. These are called unused RRSP contributions. It would be unusual, but you could carry forward a contribution to deduct even after you have already converted your RRSP to a RRIF at age 71.

RRSP contributors need to look at their current income and anticipated income in retirement. If someone decides to carry forward an RRSP contribution, it should be because they anticipate being in a higher tax bracket in the next year or two. Otherwise, due to the time value of money, delaying the refund may not be worth it.

In other words, if your tax refund could be 10 per cent higher in a year, maybe it is worth waiting a year to contribute, because it could provide a 10-per-cent tax-free return. But it could be less advantageous if you wait several years to claim the deduction and generate the refund.

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One reason to delay an RRSP deduction could be if you’re planning to sell non-registered investments or an asset such as a cottage that will trigger a large capital gain that could be offset. Or, you could be in line for an expected bonus or some other extraordinary increase in your income. Correctly timing the deduction could have an impact worth thousands of dollars.

In your case, Antoinette, your income will definitely be higher next year. It sounds like your salary will be similar, but you will also have a 2022 minimum RRIF withdrawal of 5.28 per cent of your 2021 year-end account value. RRIF withdrawals are fully taxable income. Therefore, you may be able to generate a higher tax refund next year by deferring your deduction by one year.

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Also consider you can split up to 50 per cent of your RRIF withdrawals with your spouse, if you have one. Doing so will allow you to lower your combined tax payable if your spouse’s income is lower than your own. If your spouse is younger, you could also continue to contribute to a spousal RRSP for them until the year they turn 71. You just cannot contribute to your own RRSP anymore.

Deferring taxable RRIF income can also be accomplished by using a younger spouse’s age in calculating your RRIF minimum payment. This option is available to you when setting up your RRIF account. Since required RRIF withdrawals increase with age, using a lower spouse’s age to calculate your RRIF withdrawals instead of your own age can minimize income and defer tax.

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One thing to note: you may want to consider paying down any debt on high-rate credit cards or unsecured loans instead of contributing to your RRSP or spousal RRSP.

Should you contribute to your RRSP one last time and carry the deduction forward? Maybe, but only if your tax rate will be a lot higher next year. Consider spousal RRSP contributions and splitting your RRIF income with your spouse as other tax reduction techniques as well.

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Andrew Dobson is a fee-only/advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc.

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