Six Things You May Not Know About RRSP But Should

We’re now a month into 2020 and if you’ve set some intentions – whether to exercise more, eat healthier, travel or save money, it’s a good time to check in on how you are tracking. While I can’t help when it comes to getting into shape or making one less stop at the Mickey D’s drive-thru, I do hope these tips on how to best use your registered retirement savings plan (RRSP) to save more money and build your wealth.

With the contribution deadline of March 2 quickly approaching, it’s a topic you’ll be hearing a lot about this month. And while many people regularly contribute to their RRSP, they don’t always know all the benefits they could be taking advantage of. Sure, having an RRSP is a smart way to save on your income tax and build for your retirement, but there are a number of other ways to leverage an RRSP that you may not know about.

  1. Use your RRSP to help pay for your home

One of the great features of RRSPs is the ability they give first-time home buyers to co-ordinate their RRSP strategy with their home purchase. Under the Home Buyers’ Plan, you and your spouse can each borrow up to $35,000 from your RRSP as a down payment for your first home. That’s $70,000 you can use!

This is a great option for many because it gives you the ability to draw from some of your existing resources to help you accumulate the 20% down payment you’ll need to avoid having to pay default insurance premiums. To qualify, the RRSP funds you're using must be on deposit for at least 90 days and you must also provide a signed agreement to buy or build a qualifying home.

Even if you already have enough money for your down payment, it may make sense to access your RRSP savings through the Home Buyers' Plan. Let me give you an example:

Say you have already saved $35,000 for a down payment. Assuming you still have enough contribution room in your RRSP for a contribution of that amount, you could move your savings into an RRSP at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers' Plan. The advantage? Your $35,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home.

It's important to note that any money you borrow from your RRSP under the Home Buyers’ Plan, must be paid back over a 15-year period with minimum payments per year. If you withdrew $30,000, you’ll have to pay back a minimum of $2,000 per year.

  1. Use your RRSP to help pay for your education

Another great way to leverage your RRSP is to take advantage of the Lifelong Learning Plan (LLP). In addition to using your RRSP for retirement or to buy your first home, it can also be used to fund your or your spouse’s education. It’s similar to the Home Buyer’s Plan in that you can withdraw money tax-free from your RRSP but there are rules about how and when you have to pay it back. Here’s how it works:

With the LLP you can withdraw up to $10,000 a year, or $20,000 in total, to finance full-time education for yourself or your spouse. If both spouses withdraw funds, a total of $40,000 would be available over two years, as long as the student is enrolled in a qualifying educational institution. Most Canadian universities and colleges and many foreign educational institutions will qualify.

Amounts withdrawn under the LLP must be repaid over a 10-year period, starting five years after the first withdrawal or two years after ceasing studies, whichever comes first. There are no penalties for returning LLP funds to an RRSP before the required repayment dates, so early repayment allows taxpayers to continue to maximize the tax benefits from investing within an RRSP as soon as possible. And beginning the year after you bring your LLP balance to zero, you can participate in the plan again. In fact, you can participate in the plan as many times as you wish over your lifetime

Here is a link for more information on the Lifelong Learning Plan.

  1. RRSPs allow income-splitting in retirement to reduce taxes.

Often, after retirement, one spouse has more income than the other. For example, if you receive income from an RRIF or company pension plan, you may fall into a higher tax bracket than your spouse. By transferring up to 50 per cent of your pension income through splitting, you can reduce your tax bill and bring down your net income for tax purposes.

Using your RRSP to income split in retirement is a great strategy to reduce the taxes you’ll have to pay. To do this, you’ll need to set up a spousal RRSP, which will allow the high-income spouse to contribute (and get the tax deduction) to an RRSP for the lower-income spouse. In retirement, RRSP withdrawals can be taxed in the hands of the lower-income spouse. A win/win situation.

Even without spousal RRSPs, the pension income-splitting rules allow RRSP funds to be transferred to a registered retirement income fund (RRIF) and, once the annuitant is at least 65 years old, those RRIF withdrawals qualify to be split, up to 50%, with a spouse.

These two retirement income-splitting techniques can minimize the amount of tax a couple might pay on their retirement savings.

  1. Double dipping with your RRSP contribution

If you’ve made an RRSP contribution and expect a tax refund, instead of spending the money, you should consider putting it to better use. My advice? Put your refund into a TFSA (provided you have contribution room there). Contributing to your RRSP and then using your tax refund to add to your TFSA you will really leverage the power of your RRSP because once the money is in a TFSA, your gains will never be taxed. The other benefit of this strategy is that you’ll have a mix of long-term retirement funds through your RRSP and potentially shorter-term, more flexible funds through your TFSA.

  1. Save those contributions for later

For the 2019 tax year, working Canadians can contribute up to 18 per cent of pre-tax income annually to an RRSP up to a maximum of $26,500. Any unused contribution room can be carried forward indefinitely. But just because you have the room and the ability to make a contribution, it doesn’t automatically mean that you should. In fact, if you are a young earner with a low income, you may be better off not contributing, and allowing your contribution room to grow. Later on, when you are making more money, you can better use it to your advantage.

Let me give you an example:

Say you’re in a 30% tax bracket. If you put $15,000 into your RRSP, you’ll get a $4,500 refund. Not bad. The thing is, a lot of tax brackets are pretty close to each other in dollar terms. What does that mean? It means that it’s not a huge increase in income that will take you from a 30% tax bracket to a 43% tax bracket. If you get to that level you’ll get a refund of $6,450. About $2,000 more.

What if you are in a lower income bracket (or expect your income to increase significantly in the near future), have maxed out your TFSA and have room to invest in your RRSP? Well, here’s a pro-tip you may not know. You can actually make contributions to your RRSP and not claim them against your current income. There are a few rules that you should be aware of but in essence, you can contribute to your RRSP this year, file a form to let CRA know that you’re not using it and then include it in a future year. The money can grow in your RRSP and when you’re in a higher tax bracket, you can include it on your tax return.

  1. Make a final RRSP contribution.

I have a client who turned 71 last year and was required to convert her RRSP to a RRIF. But, she was still working and had good earned income. Because of that, she had built up RRSP contribution room that she could use this year, but since she had to convert her RRSP to a RRIF in December, she couldn’t take advantage of it. So we made her 2020 contribution in December, just before we converted to a RRIF. We knew that there would be a penalty but it was worth it. Here’s why:

Based on her income and contribution room, the client was able to contribute $20,000 to her RRSP. The penalty for the over contribution was 1 per cent for the month of December - or $200. However, on January 1, her over contribution disappeared, and she’ll now get a tax deduction on her next year tax return. Since she’s in a 40% tax bracket, according to her accountant she’ll get about an $8,000 refund. In a case like this, the $200 penalty is worth it.

If you think this might be beneficial to you please consult with your accountant first. It’s not right for everyone and you need to make sure the benefits outweigh the penalties. The other thing you need to be aware of is, that unlike the contributions you make at younger ages, with your final RRSP contribution, you don’t have a 60 day grace period. In other words, you have to make your final RRSP contribution by December 31 of the year you turn 71, and not 60 days into the following year.

And by the way, this applies to a spousal plan as well. If you’re over 71 and have converted to a RRIF, but you have earned income or unused RRSP contribution room and your spouse is under 71, you can contribute to a spousal RRSP. This will help build up your retirement assets AND you’ll get a deduction for the contribution on your tax return.

And just so there’s no confusion, even if you make a spousal contribution, your spouse can too, as long as they have their own contribution room. And of course, your spouse gets to deduct the amount of their RRSP contribution from their income.

As always, I welcome you to get in touch with me, with any questions or to let me know about future topics you’re interested in. Just email me at or click here. I look forward to hearing from you!

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Mark Shimkovitz, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.