Q: We are a retired couple getting very close to converting RSPs to a RIF (my husband has one more year). We have a substantial capital gain to report plus have some room to contribute more to our RSPs.
Should we use what we can for contributing to the RSP to offset the capital gain?
A: You can contribute to a Registered Retirement Savings Plan (RRSP) up to December 31 of the year you turn 71. If you have a younger spouse or common-law partner, you can even contribute to a spousal RRSP in their name until December 31 of the year they turn 71.
It sounds like you are both getting close to converting your RRSPs to Registered Retirement Income Funds (RRIFs), Shirley, so you have a small window left to contribute. RRSP contributions at any age should be in part based on the ability to claim deductions at a high income and take withdrawals at a low income. This is particularly true when you are so close to taking withdrawals, and the tax deferral timeline is that much less.
A large capital gain in a given year could certainly push your income up higher now than in your 70s and 80s. But keep in mind capital gains are only 50% taxable and if the investment is a joint investment, you will both report 50% of that 50% – so, 25% of the capital gain.
If the capital gain will result from an investment that can be sold off over a period of a few years, you may also be able to stagger your capital gains and stay in a lower tax bracket, Shirley.
Also keep in mind that if you have large RRSPs in the first place, your income in your 70s and 80s could be much higher than it is now due to your annual RRIF withdrawals and adding to your RRSP may or may not be worth it.
Another consideration is that you can contribute to your RRSPs prior to converting them to RRIFs and you don’t need to claim the deduction in the year of contribution. RRSP contributions can be carried forward, including after your convert your RRSP to a RRIF. The carryforward of RRSP contributions can then be deducted in a future year to offset future income, Shirley.
A recent example of this is a client I work with who turned 71 and had money in a corporation. She was still working but winding down her business and retiring by age 72 or 73. We decided to make an RRSP contribution by December 31 of the year she turned 71 to be able to claim against her corporate withdrawals post-71. She would pull money out as dividends, claim the RRSP contribution carried forward, and be done with the ongoing complexity and costs of her corporation in her 70s.
RRSPs are great tools to shift income from a high-tax year to a low-tax year. This is true whether you’re 40 or 70. At 70, the tax deferral benefit is that much less, so you really want to be sure a late-life RRSP contribution is going to shift tax from a high-income year to a low-income year.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
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