By iA Private Wealth, January 20, 2023
When you think about putting away money for retirement, the tax-efficient Registered Retirement Savings Plan (RRSP) probably comes to mind – and with good reason.
RRSP contributions garner an immediate tax break because you can deduct the contribution amount from your taxable income. Using spousal RRSPs, couples with significant differences in taxable income can split their income and lower the overall tax burden.
Any growth in RRSP value (e.g., from dividends, interest and capital gains) will remain tax sheltered until you withdraw from the plan. For many people, withdrawals begin when the RRSP converts to a Registered Retirement Income Fund. Since that usually takes place in retirement when they’re likely in a lower income tax bracket, the tax impact of these withdrawals is reduced.
Other RRSP uses
While the RRSP is ideal for enhancing retirement savings, other strategies for this plan may be viable, depending on your circumstances. Let’s consider four different uses for an RRSP.
Fund a home purchase. Under the Home Buyers’ Plan (HBP), you’re currently allowed to withdraw up to $35,000 from your RRSP to help buy or build your home. If you’re looking to increase your down payment – perhaps to avoid having your mortgage designated as “high ratio” – borrowing from your RRSP can help. Any down payment less than 20% of the purchase price results in a high-ratio mortgage. To protect the lender from default (since high-ratio mortgages are typically riskier), you’ll need mortgage loan insurance. The premiums for this coverage are added to your mortgage payments.
Even if you’re not breaching the high-ratio threshold, increasing your down payment helps reduce your mortgage and saves on interest charges. Spouses and common-law partners can also withdraw up to $35,000 in RRSP funds under the HBP. Be sure to replace the borrowed RRSP money according to the specified schedule (currently over a 15-year period). Adhere to this schedule to avoid any tax consequences.
Fund your education. The Lifelong Learning Plan (LLP) currently allows you to withdraw up to $10,000 from your RRSP in a calendar year to help cover expenses related to full-time training or other learning pursuits at a qualifying educational institution. If you continue meeting the LLP conditions, you may withdraw RRSP funds in subsequent years, up until the fourth calendar year following your initial LLP withdrawal, and up to a combined total of $20,000.
Repaying these funds to your RRSP takes place over a 10-year period, typically with 10% of the withdrawn amount repaid each year. The repayment schedule begins in the fifth year after your first LLP withdrawal. Each spouse/partner may withdraw up to the maximum LLP amount, either for individual use or to help fund one spouse’s/partner’s education.
Support children with a disability. The Registered Disability Savings Plan (RDSP) is designed to enhance the long-term financial future of people who qualify for the disability tax credit. An effective way of achieving this goal is to transfer an RRSP via your will to an RDSP as a tax-free rollover of assets. In addition to helping your child or grandchild with a disability who was financially dependent on you at the time of your death, this strategy may lead to substantial savings in estate taxes. Note that RDSP rollovers cannot exceed the beneficiary’s lifetime contribution limit (currently $200,000). This rollover will reduce the beneficiary’s contribution limit, dollar for dollar, but won’t impede eligibility regarding income-tested disability benefits for which they qualify.
Gain creditor protection. Much like insurance policies, assets held in an RRSP are protected from creditors in the event of bankruptcy (note that this does not apply to contributions or transfers made within 12 months of declaring bankruptcy). In several Canadian provinces, your RRSP is also protected from creditors even if you don’t declare bankruptcy. Additionally, RRSP assets invested in eligible products like GICs and term deposits qualify for coverage under the Canada Deposit Insurance Corporation (CDIC), where the maximum protection is currently $100,000 per qualifying deposit category, per CDIC member institution.
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This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.