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RRSP contributions for working seniors

Investments, Personal Finance

Posted by Peter Wouters

Feb 22, 2018 10:30:00 AM

Directeur, Planification fiscale et successorale et planification de la retraite, Gestion de patrimoine
Placements Empire Vie

RRSP-Contributions-For-Working-Seniors.jpgStan is turning 71 this year. He is enjoying a life filled with travel, relaxation and time with his family. Like more and more people, work is still very much a part of his life. Stan expects to work at least part-time for the foreseeable future. To Stan, this keeps his mind active and helps define who he is. He would like the opportunity to claim Registered Retirement Savings Plan (RRSP) deductions after age 71 even though he knows he must mature his own plan by the end of the year he turns age 71. What are his options?

One thing that Stan can do is contribute to a spousal RRSP...

One thing that Stan can do is contribute to a spousal RRSP until his spouse, Nelly, reaches age 71. His contributions are limited to 18% of his previous year’s earned income. Those deposits to Nelly’s plan do not affect Nelly’s ability to contribute to her own plan provided she has earned income or unused contribution room. Stan gets to take advantage of tax deductible contributions. Nelly benefits from asset splitting now, since she gains from the tax sheltering in her Registered Retirement Savings Plan. The couple benefits from income splitting later since Nelly declares the income from the plan when it matures, either in the form of an annuity or a Registered Retirement Income Fund.

He could consider an over contribution to his own RRSP.

Stan has always maximized his Registered Retirement Savings Plan contributions. He could consider an over contribution to his own plan. He can make excess contributions to his Registered Retirement Savings Plan before he matures his plan by the end of the year in which he turns age 71. Stan has earned income this year of $80,000. That means he will have $(80,000 x 18%) = $14,400 of contribution room next year. Stan can contribute next year’s contribution room in December of this year, just prior to maturing his Registered Retirement Savings Plan.

This strategy will result in a penalty for the month of December to the extent that his excess contribution is over $2,000. Taxpayers are allowed a $2,000 over contribution without penalty. The penalty is 1% per month. Specifically, Stan will be charged an over contribution penalty of $(14,400-2,000) x 1%=$124.

Taxpayers are allowed a $2,000 over contribution without penalty.

Stan’s over contribution scenario vanishes on Jan.1st of next year because he will be entitled to $14,400 of contribution room based on his prior year’s earned income. The deduction more than offsets the comparatively small penalty. The Registered Retirement Savings Plan deposit can either boost his annuity income or his Registered Retirement Income Fund (RRIF) balance, with most of that extra money enjoying some ongoing tax sheltering.

What else does Stan need to do? He will have to file Form T1-OVP which will report his over contribution to the Canada Revenue Agency (CRA). He needs to file the form and pay the penalty 90 days after the end of the current year.

 

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