Catch up to unused RRSP contribution room

Canadians have a combined $600B in unused RRSP room.

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—Updated March 21, 2014—

By now many Canadians have received their government issued tax refund cheques in the mail, the eager beavers have anyway. The rest have until April 30 to file their 2013 income tax return without fear of penalty.

The prospect of getting money back is just too good for this eager beaver so I file early every year. I case you’re wondering, I won’t be blowing my tax refund on a shopping spree. As MoneySense Senior Editor David Hodges illustrated in a recent issue, reinvesting the money back into your RRSP is definitely the way to go—the numbers speak for themselves.

That brings me to the reason for this blog post; one BIG reason. It jumped out at me as I tore the perforated edge on my crisp new cheque: “Your unused RRSP contribution room is….” Whoa!—I thought—that’s a big number. I guess I was so surprised because I’m a consistent saver. My RRSP contributions automatically come off every paycheque before I get a chance to spend the money. I’ve been saving this way since I entered the full-time workforce a few years ago.

But in retrospect, I shouldn’t have surprised at all. Here’s why: I’ve been filing income tax returns since I earned my first paycheque as a teenage snack bar attendant at a local hockey arena. That means I’ve been gaining RRSP contribution room every year since I served the first of countless hot chocolates to cold and weary hockey moms more than a decade ago.

Initially I was tempted to ignore the 5-figure number. After all, I’m not alone. Canadians have more than $600 billion in combined unused RRSP contribution room. These apathetic thoughts disappeared however as soon as I realized I just received a gift from my 16-year-old self.

You see, I’m lucky enough to work for an employer that provides a defined-benefit pension plan. For 2013, Canadians can claim the lower of 18% of their earned income or $23,820 as their RRSP deduction unless they are a member of parliament or have a DB pension plan. This second group can only claim that amount less what has been socked away in their other registered plan that year. This is called a pension adjustment (PA) and the amount is reported your T4 slip (Box 52, line 206). My best guess is that this rule exists to level the playing field for all Canadians saving for retirement. And while I’m not complaining by any means, the PA does reduce my personal RRSP annual contribution allowance by a substantial amount. So back to that gift…now that I’m a little older, a little wiser and earning a full-time salary I can tap that unused room and for the time being pay less tax. Sure, I’ll be taxed on my savings eventually, but if time my withdrawals properly (when my income is low) it shouldn’t sting too much.

So thank you 16-year-old me for the huge RRSP potential! Of course in order to realize this potential, adult me has to up my savings game. It will be impossible to catch up to my unused RRSP room in one year, especially this year of all years. (I’m getting married and the money coming in seems destined for everywhere and everything except my savings.) Instead, I’ll have to put a dent in the RRSP bucket over time by gradually increasing my personal savings rate. First thing’s first: Reinvest the tax refund cheque back into the RRSP. It’s a head start if I’ve ever seen one. And I’m on my way…

2 comments on “Catch up to unused RRSP contribution room

  1. If you can put the maximum RRSP contribution do it. It is well worth it.Many financial experts or advisers keep saying don't touch your RRSP until you have to by age 71 which is current tax law and you must cash in,covert to a RRIF,convert to an annuity.You could do a combination of these but it all depends on all your person situation or needs.

    There is way to reduce my taxes today,increase future wealth and retire earlier without running of money over the long term.This is how it works.You start a plan of buying strip bonds with different maturity dates.They will mature when you think you will need the money to retire.If you think it is 57 than you buy strip bonds that mature until that age.You keep buying them with a each successive year until 58,59,60 etc.

    If a couple's income is say $65,000 a year combined they can put $11,700 a year in a RRSP.This will save them about $3,500 a year in annual income taxes.The main problem people have in retirement is that they have all their money in RRSP's or other higher taxed income from registered accounts and have some debts as well.This is why you have to save in TFSA's and non-registered accounts besides your RRSP's etc.Here's an idea of today's situation, 22 year provincial strip bonds are yielding about 3.60%. so the $11,700 RRSP contributed every year until age 57 will be a combined RRSP value of $382,616.55. Each RRSP strip bond will be worth $25,474.20 when they mature at 57,58,59,60 until age 79.

    This $25,474.20 will have minimal income taxes because each spouse has a personal amount today of federal $10,820 so in 22 years it will be at least 60% higher than this.The $25,474.20 would be about 50%/50% so $12,737.10 per taxpayer.The personal amount which is the amount of money that is non taxable.You can see that if a couple does until they are 57 years old all the RRSP strip bonds will finish at age 79.

    The couple should contribute $5,500 each in TFSA's per year and buy the same strip bonds for 22 years. The $11,000 a year in TFSA's for 22 years in the same strip bonds would be worth at age 57 $359,724.96.The TFSA's at say a 3.60% yield would generate $12,950.10 in annual interest income tax free .This is an equivalent to about $17,500 a year in taxable income at a middle income tax rate.The $3,500 a year income tax refund could be put in a combination of the following, firstly put 7 years in a savings account for liquidity and safety,secondly buy laddered GIC's of 3,4,5 years for the remaining 15 years.So at an average 2.00% interest rate it would be worth $95,546.44 at age 57.In the same 2.00% short term interest rate investments it would provide about $2,000 in annual interest income.

    To clarify at age 57 the couple would have $25,474.20 in maturing RRSP's that they will withdraw each year until age 79 if needed and pay little income tax.The TFSA's would spinoff $12,950.11 in annual interest income tax free so no depletion of capital or principal.The $359,724.96 TFSA's will not be touched. The short term investments will provide an additional $2,000 a year in annual income at 57.This is a combined income of about $40,424 at age 57 and little income taxes payable with a couple has no mortgage,debts or any kind.

    This plan starts at 35 until 57 and there is no more mortgage or other debts.I am using an example of a couple buying a house at 22 and paying it off in 13 years. I am using an example of a $335,000 house maximum price all costs,taxes,fees,furniture etc. included and a 10 year fixed mortgage at 3.69% and 3 years fixed at 6.00%. The total cost of home ownership per month is about $3,200 a month mortgage,utilities,property taxes,maintenance,repairs,H,S,T.CMHC premiums,home insurance etc.The combined net income of the couple after income taxes,C.P.P.,E.I. is $4,600 a month so after the couple's homeowners mortgage,property taxes,CMHC premiums,home insurance,utilities,maintenance,repairs etc. there is about $1,400 a month or $323 a week left for car insurance,vehicle financing paying off in 5 years,gasoline,maintenance,repairs,food,clothing,telephone,internet etc.

    I am using 35 years old and 57 years old but if you want to use 38 and 60 or 40 and 62 use the plan to your fit your personal situation.What ever age you use as the paid off mortgage one thing is clear the $2,695 monthly cost of mortgage plus CMHC insurance premium is gone in 13 years so that is money in your pocket.If assume any raise in 13 years was taken by income taxes,C.P.P,E.I. the same $4,600 a month is left or net income.Remember,the couple is putting $11,700 in RRSP's,$11,000 in TFSA's,$3,500 annual savings,GIC's non registered money so a total $26,200 a year or $2,183.33 per month in these plans with 22 year government strip bonds.

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  2. Continuation from my first comment which would not all fit.

    Basically the couple is putting $26,200 a year or $2,183.33 per month in all RRSP's,TFSA's,savings,GIC's.The total mortgage and CMHC premiums were $2,695.00 per month but are gone once the mortgage was paid off at 35 years old for the couple.They are still netting the same $4,600 a month after raises but income taxes,C.P.P.E.I. reduced their pay to remain the same after 13 years.The net income is $4,600 per month plus $292 a month income tax refund a total $4,892.00 per month.They will have a net $2,709 a month or $32,508 a year for living costs after 13 years of rising inflation.

    This is net $625 per week to pay property taxes,utilities,telephone,internet,gasoline,car insurance,H.S.T.,maintenance and repairs for car and house,home insurance,clothes,food,car paid in 5 years or buy used car etc.I know car payments financed for 5 years is debt but you own the car it's not a lease that you never own the car.This is the only debt they would have needed for transportation.If they can pay some cash or all by buying a lower priced used car even better.

    The main points I want to reinforce to people is don't get into credit card debt,pay off the mortgage in maximum 13 years,don't use the mortgage free house as a bank machine borrowing against with home equity loans,line of credit etc.,don't get into any debts expect for a car you can pay for in maximum 5 years,don't lease cars,vehicles.Please live within your means and don't make risky investments of all types with your(TFSA's,RRSP's,savings etc.). Finally, live debt free as much as possible,use cash,debit as much as possible and stick to your plan,be disciplined.I hoped I helped someone today.

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