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For many the arrival of January means our attention turns to finishing up this year’s Registered Retirement Savings Plan (RRSP) contribution. Today we review some of the misunderstandings, myths and otherwise incorrect assumptions surrounding RRSPs.
Myth #1 - I’ve Worked, Therefore I Can Contribute
While it is true that one’s ability to contribute to an RRSP is based on the contributor having earned income, the income must have been earned in a previous year. This becomes particularly confusing during the first 60 days of the year as individuals have the ability to make a contribution related to two tax years. For example, during the first 60 days of 2012, contributions can be for either the 2012 or 2011 tax year. Individuals making their 2011 contribution will do so based on their 2010 earned income.
Myth # 2 - Once I Turn 71, I Can No Longer Contribute to an RRSP.
This is not true. Someone who is over the age of 71 who has had to collapse their RRSP can still make a spousal contribution. This of course assumes that (1) the spouse still has an RRSP i.e. is 71 or younger and (2) the contributor is able to contribute because he either had earned income the previous year or still has unused contribution room.
Myth # 3 - I Can’t Contribute in the Year I Convert My RRSP to a RRIF.
This is incorrect. Given that an RRSP must be collapsed by December 31st of the year you turn 71, an individual is able to make an RRSP contribution right up to and including the day the RRSP is converted.
Myth # 4 - I Can Use My Spouse’s Age to Determine My Minimum RRIF Payment.
This is in fact not a myth, but is correct. Most annuitants will want to do this where their spouse is younger, to ensure that a lower minimum payment will be received and less tax will have to be paid.
Myth # 5 - It Is Possible To Get My Money Out Of an RRSP/RRIF Tax Free.
Impossible but surprisingly it is a common question. It is no more possible to get money out of an RRSP tax free, than it is to receive employment income tax free. Those claiming to be able to do so, are in actual fact creating a leveraged asset strategy where the interest on the loan used to invest in a portfolio is used to offset the income from the RRIF - a risky venture to say the least, for those individuals who are retired.
Myth # 6 - I Have to Use Cash to Make My RRSP Contribution.
You don’t have to use cash. You can also use stocks, bonds or mutual funds and make what is known as a "contribution-in-kind". The thing to remember is that the contribution of the asset is considered a disposition for tax purposes and as a result, tax would have to be paid on the capital gain. It is also vital to remember that if a capital loss should result from the transfer, this loss cannot be used for tax purposes.
Myth # 7 - The Last Day to Contribute Is February 28th. The Canada Revenue Agency (CRA) allows an RRSP contribution to take place in the year or within 60 days after the end of the year. Since February has 28 days, the last day to contribute is normally March 1st. However, for 2012 February has 29 days so the last day to contribute is February 29, 2012.
Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group, associate director wealth management and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.
Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.
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