You Asked: Questions About Lesser-Known RRSP Opportunities

Overall Registered Retirement Savings Plan (RRSP) participation has fallen since the start of the millennium, from 29.1 percent of taxpayers to 21.7 percent in 2022. The good news? Higher-income earners remain engaged: In 2023, 66 percent of taxpayers earning $200,000 to $500,000 contributed, often fully maximizing contribution room.

Many people understand the basics of RRSPs, but here are three questions that highlight some lesser-known RRSP opportunities:

1. Can I hold the RRSP and the RRIF at the same time?

Yes. Investors typically convert funds to a Registered Retirement Income Fund (RRIF) on a tax-deferred basis once the RRSP needs to be wound down at age 71. However, there may be situations in which holding both makes sense. For example, if you want to generate pension income to take advantage of the federal pension income tax credit, you might open a small RRIF at age 65, while continuing to hold your RRSP until the end of the year in which you turn 71 to capture ongoing tax deductions.

2. What is the “forgotten” RRSP contribution at age 71?

In the year you turn 71, you must collapse your RRSP by December 31, after which no further contributions are allowed. Since contribution room is based on the previous year’s earned income, working during the year may create additional room. Contributions made before year-end will create a temporary overcontribution, which may be offset by potential tax savings. For example, a $20,000 overcontribution made in December will incur a 1 percent per month penalty, or $200, but in January, it is no longer considered an overcontribution. At a 40 percent marginal tax rate, it could potentially provide $8,000 in tax savings. Don’t forget: A lifetime $2,000 overcontribution is permitted without penalty.

3. I plan to work past age 71. Should I consider a spousal RRSP?

If you have a spouse/common-law partner, a spousal RRSP allows you to contribute on behalf of your spouse while receiving a tax deduction based on your own RRSP limit. The spouse is the annuitant, so withdrawals are taxed as their income. This provides income-splitting opportunities if your spouse is in a lower tax bracket. If your spouse is younger and you work past 71, you can contribute until the end of the year they turn 71, allowing you to continue receiving tax deductions.