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

RRSP Retirement Personal Finance

Should this reader now be making the final contribution to an RRSP? Or do you keep it for some time in the future after you retire?

Publication date:

Jan 21, 2022 • Jan 21, 2022 • 4 minute reading time • Join the conversation Although you must claim an RRSP contribution in the year it is made, you can carry over the deduction to use in a future year. Photo by Getty Images/iStockphoto Files

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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 joining a Registered Retirement Income Fund (RRIF). Do I have to contribute one last time to save the government about $10,000 in taxes? It feels strange to commit money when I am so close to forced withdrawals. I read that you can make the contribution and then save it for another 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 plan to continue working until I am 75, so another five years. — Antoinette

FP answers: One of the benefits of RRSPs is that you can use contributions and withdrawals to try to plan your income for the current year and future years so that you can minimize your lifetime taxes. If you turn 71 this year, you can contribute until December 31, and the required withdrawals will begin next year after you convert your RRSP into an RRIF. There are a few things to consider when deciding to make one last contribution.

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

RRSP contributors should look at their current income and projected income at retirement. If someone decides to transfer an RRSP contribution, it should be because they expect to move into a higher tax bracket in the next two years. Otherwise, it may not be worth delaying the refund due to the time value of money.

In other words, if your tax refund could be 10 percent higher in a year, it might be worth waiting a year to contribute because it could yield a 10 percent tax-free return. But it may be less beneficial if you wait several years to claim the deduction and receive the refund.

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One reason to defer an RRSP deduction may be if you plan to sell an unregistered investment or asset such as a cottage, creating a large capital gain that can be offset. Or you may qualify for an expected bonus or other extraordinary increase in your income. Timing the deduction correctly can have an impact of thousands of dollars.

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In your case, Antoinette, your income will definitely be higher next year. It sounds like your salary will be similar, but you’ll also have a 2022 minimum RRIF withdrawal of 5.28 percent of your 2021 closing account value. RRIF withdrawals are full taxable income. Therefore, you may be able to generate a higher tax refund next year by deferring your deductions for a year.

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Also, keep in mind that you can split up to 50 percent of your RRIF withdrawals with your spouse, if you have one. Doing this will help you reduce your combined tax liability if your spouse’s income is less than yours. If your spouse is younger, you can also continue to contribute to a spousal RRSP for them until the year they turn 71. You simply can no longer contribute to your own RRSP.

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

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One thing to note: You may want to consider paying off debt on high-interest credit cards or unsecured loans instead of contributing to your RRSP or spousal RRSP.

Do you have to contribute to your RRSP one last time and transfer the deduction? Maybe, but only if your tax rate is a lot higher next year. Also consider spousal RRSP contributions and splitting your RRIF income with your spouse as other tax relief techniques.

Financial item

Andrew Dobson is a Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) at Objective Financial Partners Inc.

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This post FP Answers: When is the best time to make my last RRSP contribution?

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