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News Story
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Maximizing Your RRSP from a Taxation Standpoint
By Ottawa Business Journal Staff
Mon, Feb 20, 2006 11:00 AM EST
It's RRSP season again and the March 1, 2006 deadline for 2005 tax-deductible contributions is coming up soon. While you're considering your investment decisions, you may also want to keep in mind the potential tax planning benefits of your RRSP. The following ideas will help remind you of some of your options for getting the most out of your RRSP.
Time your deductions to enhance tax savings
The tax savings you'll earn on your 2005 tax return by making your 2005 RRSP contribution by March 1, 2006 will depend on your marginal tax rate. Generally, if your income is taxed at the top rate (46.4 per cent on income in excess of $115,740 in Ontario), your RRSP deduction will create current tax savings of 46.4 per cent of the amount you contribute.
If your income falls into one of the lower tax brackets in 2005, the deduction will be worth proportionally less, anywhere from 20.5 per cent to 43.4 per cent. In light of the different marginal tax rates, keep in mind the following tax saving ideas:
In a low-income year, consider making your maximum possible RRSP contribution but deferring claiming the deduction until a later year when your income is taxed at a higher marginal rate. This strategy can maximize the tax-free growth of funds while also maximizing your tax savings.
Similarly, if you're making a large RRSP catch-up contribution, consider only claiming enough of the resulting deduction to reduce your taxable income in the top tax brackets. You can carry forward the remaining deduction to help achieve greater tax savings in a future year against income that is taxed in the higher tax brackets.
Boost the benefits of your RRSP
To increase your RRSP's benefits, keep the following ideas in mind:
Consider the preferred tax treatment for dividends and capital gains on investments held outside your RRSP when determining which types of assets to hold inside your RRSP.
Consider a spousal RRSP for retirement income splitting if you expect your spouse's retirement income to be lower than yours.
Make your maximum allowable contribution for 2005 to maximize your tax savings. You can contribute 18 per cent of your "earned income" in 2004 or $16,500, whichever is less. If you're a pension plan member, your maximum contribution may be reduced. Keep in mind that you may have unused contribution room from prior years if you have not been making your annual maximum allowable contribution.
Rather than waiting until the March 1, 2007 deadline, consider making your 2006 contribution now, or as early as you can, to begin accumulating tax-free income on the contribution as soon as possible. For 2006, you can contribute 18 per cent of your earned income in 2005 or $18,000, whichever is less (again, if you're a pension plan member, your maximum contribution may be reduced). You should take the appropriate steps necessary to determine your contribution room, as overcontributions in excess of $2,000 are subject to a penalty of 1 per cent per month until the excess is withdrawn.
If you are turning 69 in 2006, consider options for maturing your RRSP and remember to make your final contribution by December 31, 2006.
Consider Home Buyer's Plan withdrawals to buy your first home or Lifelong Learning Plan withdrawals to further your training or post-secondary education, but be sure to weigh the loss of RRSP growth. If you have previously withdrawn funds from your RRSP under these plans and you have amounts outstanding to be repaid, ensure that the minimum repayment is made to avoid an income inclusion and consider repaying as much of the outstanding amount as possible in order to maximize the tax-free growth of the funds.
Self-directed RRSPs — A broader range of investment options
A self-directed RRSP can offer a wider range of investment choices, though it generally requires more time and attention than a conventional RRSP and may involve more risk, depending on the investments you choose. If you decide to set up a self-directed RRSP, consider the following tax planning ideas for maximizing its benefits:
Consider transferring securities you already own to your self-directed RRSP to shelter future gains and get a tax deduction without any cash outlay (remember that you'll have to pay tax on any unrealized capital gains when you make the transfer).
Consider triggering capital losses on shares that have declined in value by selling the shares into the market, contributing the cash proceeds to your RRSP and having your RRSP reacquire your position after 30 days (remember that if you transfer the shares directly to your RRSP, you won't be able to claim the capital loss).
Evaluate whether you should change your self-directed RRSP's mix of foreign and domestic holdings to diversify your investments. Since the 30 per cent limit on foreign property held by RRSPs was eliminated as of 2005, you may want to consider increasing your RRSP's foreign investments, depending on your circumstances.
Consider transferring shares of start-up or other companies with high growth potential to your self-directed RRSP to shelter future gains from tax.
Conclusion
Your RRSP is an important component of your financial plan. You should ensure that the investment decisions that you make for your RRSP are made as part of your overall investment and tax planning strategy. Doing this will help keep you on track toward reaching your personal financial goals.
Glen Stewart is a Senior Tax Manager in the Ottawa office of KPMG. With over nine years of experience with KPMG, Glen assists a variety of medium to large businesses with personal and corporate tax issues. He is a member of KPMG's Enterprise group, a group dedicated to finding value-added tax strategies to help companies manage corporate and capital taxes and enhance shareholder value.
Glen Stewart
Senior Manager, Tax
phone: (613) 212-3714
e-mail: gstewart@kpmg.ca
www.kpmg.ca
KPMG LLP is the Canadian member firm of KPMG International, the coordinating entity for a global network of professional services firms, providing audit, tax, and advisory services, with an industry focus. The aim of KPMG International member firms is to turn knowledge into value for the benefit of their clients, people, and the capital markets. With nearly 94,000 people worldwide, member firms provide audit, tax, and advisory services from 717 cities in 148 countries.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation
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