Most Canadians, by now, are well aware of RRSPs and how they work: Contribute savings to a plan and you get an immediate income-tax deduction. Also, investment income and capital gains are not subject to tax until withdrawn from the plan. To further entice us to this mode of saving, the federal government has steadily increased RRSP contribution limits over the years, giving us more and more room to build our retirement nest-eggs.
But few taxpayers seem to have responded to higher limits. As Ottawa gets set to end the steady increases, history indicates potentially lower contribution limits won't matter to most Canadians.
Roughly one-third of eligible contributors actually made RRSP contributions in 2009, according to BMO Retirement Institute. And according to Statistics Canada, the median contribution in 2008, when the contribution limit was $20,000, was $2,700. That's the same median as eight years earlier, in 2000, when the maximum deduction was considerably lower at $13,500.
For 2010, you may contribute 18% of your previous year's earned income, up to a dollar amount of $22,000. That's up from $21,000 in 2009. You'd qualify for that maximum 2010 contribution if you earned income of $122,222 in 2009.
After 2010, the maximum deduction levels no longer follow a set schedule of steady increases but are instead indexed to the change in the average national wage level. Based on this formula, prescribed contribution limits grow more slowly. They'll rise to $22,450 for 2011 and $22,970 for 2012.
RRSP contributions must be made by March 1, 2011 in order to qualify as a deduction for the 2010 tax year. However, RRSP deductions don't have to be deducted in the year they're made.
In fact, for 2010, you can deduct contributions you made to your RRSP all the way back from Jan. 1, 1991, when the carry-forward rule for unused contribution room was introduced, provided they have not been deducted for any other year.
Getting money out of your RRSP
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Participation in a company pension plan will reduce the amount you're allowed to contribute. As long as you're up to date on filing your tax returns, you won't have to calculate your contribution limit because it appears on your latest Notice of Assessment from Canada Revenue Agency (CRA).
Whether as a deliberate strategy to maximize tax-sheltered growth or inadvertently, you may over-contribute up to $2,000 without penalty. No tax deduction is available for the over-contribution, however, and anything over $2,000 will be subject to tax of 1% per month until the excess is withdrawn.
You're also permitted to move securities you already own into your RRSP as a contribution as long as they are qualified investments. This can be a helpful alternative if competing financial responsibilities make it difficult for you to contribute cash.
With a so-called in-kind contribution, you generate a tax deduction equal to the fair market value at the time of your contribution. You are deemed to have sold the securities at the time of the contribution and capital gains must be reported for tax purposes. But if you've lost money on the securities you're contributing, be aware that you cannot claim capital losses for tax purposes when making in-kind contributions to an RRSP.
A self-directed RRSP may hold a wide range of investments, including most securities listed on Canadian and foreign stock exchanges, options to purchase those securities, mutual funds, T-bills, GICs, and even shares of unlisted small-business corporations, as long as the planholder is not a "connected shareholder."
While foreign-content limits for RRSPs were eliminated in 2005, the ability to hold and trade in U.S. dollars remains problematic. Although CRA rules allow U.S. currency to be held in RRSPs and other registered plans, very few providers actually provide this capability. Generally, when purchasing a U.S. security, investors see their Canadian dollars converted to U.S. dollars, then converted back to Canadian currency when the security is sold.
A welcome exception is Scotia iTrade, which on Jan. 18 launched its U.S.-Friendly RRSP account. The discount brokerage charges a flat quarterly fee, rather than transaction fees, for currency conversions. This enables clients to save on the cost of Canada-U.S. currency-conversion spreads.
There are some clear-cut exceptions to the qualified investments list. For example, you're not allowed to hold futures contracts and real estate. If you do acquire a non-qualified investment in your RRSP, its value will be included in your income, and any income earned by the investment will be taxable as ordinary income in the year it's earned.
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