An Accountant’s Viewpoint – Part 11
Many Canadians employ RRSPs as a tax-efficient retirement savings vehicle. This month’s blog article explores an important step we all must take with our RRSP at some point.
Stated simply, you can’t have an RRSP past December 31, 2017 if you’re 71 or older at year-end. So, prior to December 31, 2017, you must collapse your RRSP and pay tax on the fair market value of the plan’s assets at that time if you convert it to a cash payment, or you may purchase an annuity, or transfer your RRSP assets to a RRIF. No tax is paid at the time of the purchase of an annuity or at the time of a conversion to a RRIF. You will instead pay tax on each payment installment your annuity or RRIF.
If you will generate RRSP contribution room for 2018 because you have earned income in 2017, but you have to collapse your RRSP before the end of 2017, consider making an over-contribution to your RRSP in December, immediately before collapsing it. The amount of the over-contribution should equal $2,000 plus the 2018 contribution limit. A 1% penalty tax on the over-contribution in excess of $2,000 will apply for December 2017 — however, this will end on January 1, 2018 when the new contribution room becomes effective. The basic $2,000 over-contribution will become deductible when you generate additional RRSP room in the future and will never attract the 1% over-contribution penalty tax. If you won’t have earned income after 2017, then you may not want to make an over-contribution. Ask your advisor if this type of planning makes sense for you.
If you must collapse your RRSP this year, you can still contribute to your spouse’s RRSP if you have contribution room and your spouse has not reached age 71 by December 31, 2017. This is an excellent way to build up your spouse’s RRSP and your family’ overall retirement savings.
Please contact me to discuss all your retirement planning options and the taxation implications they may bring.
Jonathon (Tug) McGraw, BCOMM, CPA, CA
BDO Canada LLP
Jonathan can be reached at: firstname.lastname@example.org