RRSP Myth #3 & #4
Posted by Gail | Filed under Retirement Planning, Saving
If you think that you have to be over 19 to contribute to an RRSP, you’re fallen prey to Myth #3. This misunderstanding came about because people under the age of 19 aren’t allowed to make an over-contribution to their RRSPs. However, anyone in Canada who has earned income and has filed a tax return, regardless of age, has RRSP contribution room. That includes kids with a paper-route, those that baby-sit, and children who have promising modeling or television careers.
Even if there’s little point in a kid claiming the RRSP deduction because she owes little or no tax, the benefits of contributing to an RRSP makes the exercise worthwhile. First there’s the magic of compounding return. A single RRSP contribution of $500 at age 15 compounding at an average return of 5% will grow to more than $5,700 by 65.
That’s not so much money Gail! No? Well it’s $5,700 she didn’t have to earn, so how can it not be worthwhile?
The second benefit is that since a child’s RRSP tax deduction can be carried forward indefinitely, when she does start working full time, she’ll have deductions she can use to offset the tax on her income.
Myth #4 is another age-related myth: if you’re over 71 you’re out of the RRSP business. Once you turn 71 you can no longer make contributions to an RRSP. If you happen to still be generating earned income, too bad! You’re out of luck. Maybe not.
If you’re turning 71 but will continue to have earned income, whether from rental property, a professional practice or business ownership, there’s a way to get a deduction in the year you turn 72, even if you’re not allowed to make an RRSP contribution. In early December of your last year of contribution, make an additional contribution based on your earned income for that year. Yes, that’s technically an over-contribution. And yes, if it’s over the $2,000 lifetime limit, you’ll start incurring the one-percent-per-month fee. But that’ll only happen until the calendar clicks over to the new year, so that means only one month’s worth of penalty. Now, even though you’re not allowed to make a contribution, you can claim the deduction for the contribution that you made last year. This could also help reduce your exposure to the OAS clawback by reducing your taxable income. Just remember not to get greedy. Don’t reduce your income to such a low point that you bring the alternative minimum tax into effect.
Also keep in mind that contributions to a spousal RRSP are based on your partner’s age. So even if you are an old geezer, as long as your partner is under 71 you can contribute on his or her behalf and grab a deduction.
January 10, 2013 at 7:17 am
Good to know Gail, I will definitely consider this when I have children.
January 10, 2013 at 8:52 am
Another benefit of having your child contribute right from when they are first earning income, is that you and your child get into the RRSP habit. By the time they are in their 20’s, they will have been putting money aside into their RRSP for “so long”, that it’s become a haibt and just what they do every year.
January 10, 2013 at 9:55 am
Thanks for the information Gail! I had sent a question to you in the Fall as my eldest had just started earning money from a p-t job. I’ll file his first return this year so he’s got contribution room for upcoming years. 50% of his income is spending, 25% is “planned spending”, and the other 25% is for long-term savings. If it doesn’t get all used up for his post-secondary (we have RESPs as well, but he’s got to save for his spending $ if he’s not able to work), then it goes into an RRSP as his very first contribution…which he’ll have room to do so!
Gosh, wish I knew when I was his age what I know now…or that my parents did.
January 10, 2013 at 9:57 am
Related to kids; if they have income but it’s low enough that you don’t bother filing a tax return, consider filing a tax return for them anyway – particularly if they’re going to contribute to an RRSP next year.
RRSP room is based on *last years’s* income so if they didn’t file a tax return last year, they won’t have any room this year. If you filed a return last year, they’ll have some contribution room.
January 10, 2013 at 10:27 am
I have lots of catch up room in my RRSP…. some of that will be going in monthly this year, and when my debt is gone in 18 months it will be going in like a house on fire! Will be using that extra tax benefit to pay off the mortgage…. Hopefully get all this done in 5 years and all my income after 60 will be put in my nest egg. We single girls need to look after ourselves! Love your books, have the new one on my “to buy” list….
January 10, 2013 at 10:57 am
When our kids turned 12, we opened dividend accounts with us as trustees and started them off contributing every month. That way they built equity and got in the habit of paying monthly. It also helped them learn money management skills. Once they turned 18 we took our names off and they had enough money to diversify and open a RRSP in their own name.
January 10, 2013 at 11:01 am
I would love a post on long term savings for kids – RRSP/RESP…ect…what’s the best route?
January 10, 2013 at 5:37 pm
Hi Gail, Love your books. My question is actually, well i guess I have two, do you hold life license or investment license? Second Question is do you know much about this new registered Disability savings Program? (or RDSP as it is called)
January 11, 2013 at 12:24 pm
[...] Gail Vaz-Oxlade continues her series on RRSPs with her post on RRSP Myth #3 & #4. [...]
January 12, 2013 at 2:18 am
re: Myth #4 ; this is valuable information that will shared and will be put into action.
re: ” So even if you are an old geezer…” .
There are many “old geezers” currently employed throughout the trades as their knowledge and journeyman/woman skill level are in high demand.
January 13, 2013 at 10:06 am
Marcy the information about the RSDP can be found here:http://www.hrsdc.gc.ca/eng/disability_issues/disability_savings/cdsg.shtml . Basically is your disabled and your gross family income is under $87123 if you contribute $1500 the government will contribute $3500. You can also go back up to 10 years, (although currently the program has only been in existence six years so right now you can get up to 6 years back. The max amount the government will pay in any one year is $10500. So if you want to get the full government grant you have to spread it out over two years. Also if you make 25,356 or less and you open a RDSP the government will deposit $1000 a year, without you depositing anything. So lets say you make less then $25356 and you contribute $1500 a year to the RDSP the gov’t would give you $4500 every year ($3500 grant)and ($1000 bond) If you make more then $25356 but less then $43561 the government would put in a prorated amount every year based on your income. There is a lifetime maximum grant of $70000 and a lifetime bond of $20000. You also to be under 49 to qualify for grant or bond money.
January 19, 2013 at 10:59 am
re: Myth #3 You only qualify for the $2,000 “excess contribution” if you were 19 or older at any time in the tax year. It is worthwhile to file tax returns for children to begin accumulating RRSP contribution room. Any actual contributions made to an RRSP will be considered excess contributions and you will be subject to a tax of 1% per month.
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