Mar 1, 2019
Personal Investor: 5 common RRSP myths debunked
By Dale Jackson
March 1 is the registered retirement savings plan contribution deadline. Or is it? The fact is, you can contribute to your RRSP any time. This year’s deadline only applies of you want to lower your 2018 tax bill.
That’s just one of the many common misunderstandings about RRSPs. Here are five of the biggies:
1. You must invest your contribution by the March 1 deadline: Wrong. You only have to contribute by the deadline to be able to apply it to your 2018 taxes. You can park it in cash and invest it in just about anything whenever you want – or never if you’re into cash that grows at a snail’s pace.
2. RRSPs are a tax exemption: Wrong. RRSPs are tax deferrals and there's a huge difference. An exemption is forever – like gains in a tax-free savings account (TFSA). A deferral means you will have to pay tax at some point in the future. An RRSP is a temporary tax shelter that allows the plan holder to delay paying taxes on contributions until the money is withdrawn. RRSPs are popular because they allow savings to grow tax free until the plan holder is in a lower tax bracket – normally retirement.
3. You should always try to contribute as much as possible: Not always. If the amount is too high, the government could claw back your Old Age Security (OAS) benefits when you turn 65. Claw-backs can be avoided by income splitting where taxable income is split with a lower-income spouse. There is also a risk income taxes could be higher when the time comes to withdraw. There's a strong argument for young investors to delay making RRSP contributions until they are in their higher income years and the tax savings are bigger.
4. You must take advantage of your maximum allowable contribution the year it is issued: Wrong. The difference between the allowable amount and what you contribute can be used in later years. You can carry forward any amount you want.
5. You cannot make a withdrawal from your RRSP until you retire: Not true. Money from an RRSP can be withdrawn any time, but it's important to know Ottawa will impose a withholding tax of as much as 30 per cent and it will be taxed at your marginal tax rate in the year of the withdrawal. The government allows exemptions such as the Home Buyers’ Plan, where the plan holder and spouse can each borrow up to 25,000. Repayment must begin no more than two years later, and must be fully repaid within 15 years. The offer is only available to first-time homebuyers. The Lifelong Learning Plan also allows investors to withdraw up to $20,000 tax free for full-time training or post-secondary education. The full amount must be paid back within 10 years.
