Tax Tip Thursday

The rule is, by the end of the year you turn age 71, you must convert your RRSP to a RRIF and you can no longer make contributions to your RRSP.

Creating RRSP Room

Interestingly, although you can not contribute to a personal RRSP you can continue to earn RRSP contribution room after age 71. If you earn employment income at age 71 or beyond, then you will also earn more RRSP contribution room at the typical rate of 18% of earned income.

Unused RRSP Contribution Room

If you have unused RRSP contribution room, this will carry forward past age 71.

BUT, you will NOT be able to contribute to your RRSP.

Well, there are a few things that can be done to get around the age limit for RRSP contributions and, in the right situation, this could provide some large tax reductions and/or government benefit increases.

So, what options do you have, to use a RRSP contributions after age 71?

Option 1: Using Unused RRSP Contributions After Age 71

Although you can NOT make a new RRSP contribution after age 71, any unused RRSP contributions that you have made previously and carried forward, will still be eligible for deduction after age 71.

This could be a great planning opportunity if you expect a large capital gain in the future or even additional employment income after age 71.

Option 2: Making An Excess RRSP Contribution At Age 71

If you are still working in your 71st year, and you have “earned income”, then this income will generate RRSP contribution room the following year (when you are 72).

As we discussed above, in the year you turn age 72 and beyond you can no longer use that new RRSP contribution room.

What you can do though, is in December of the year that you turn 71, you can make an excess RRSP contribution equal to the amount of RRSP room generated by your income in the year you turned 71.

Technically you will have over contributed to your RRSP for one month in December, which will incur a 1% penalty for the month of December. The penalty will be minimal and you will be able to deduct that RRSP contribution at age 72, because it is unused and carried forward.

Using this option requires anticipating the new RRSP contribution room that will be earned. Making the wrong calculation could result in an over contribution, so be careful when using this option.

Option 3: Using A Spousal-RRSP

Although you can NOT contribute to a personal RRSP after age 72, you can contribute to a younger partners spousal-RRSP.

Couples with an age gap can take advantage of this strategy. When partners are NOT the exact same age, they should be thinking about this strategy.

If you are 72 or older AND have RRSP contribution room AND your partner is age 71 or younger, you can make a spousal RRSP contribution and use the RRSP deduction on your tax return!

Be warned though, all the same RRSP spousal rules still apply, so income can be attributed back to the older partner if spousal-RRSP withdrawals are not planned carefully.

Contributions become more complicated after 71 – let The Mad Accountant advise on the best course of action!  Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.