|
COMMON RRSP QUESTIONS ContributionsQuestion#1: How much can I contribute to an RRSPAnswer: There are limits on how much of your RRSP contributions are tax-deductible and any contributions above these amounts will incur penalties. The limit for a year is: 18% of the previous year's earned income up to a maximum amount for the current year less any applicable pension adjustment (PA) from the previous year, plus any applicable pension adjustment reversal(PAR).Question #2: How long can I continue to contribute to my RRSP?Answer: You may continue to contribute until the end of the year in which you reach age 69, when your RRSP matures and the funds in the plan must be removed. If you still have unused RRSP contribution room, or will continue to generate earned income, you may still make RRSP contributions to a spousal RRSP after the year in which you turn 69(provided your spouse is under age 70).Question #3: Can I transfer pension income, retiring allowances or severance payments to my RRSP?Answer: Generally, any pension income you receive cannot be transferred to an RRSP. Retiring allowances or severance payments which are given to you on retirement or as compensation for the loss of employment can be transferred to an RRSP. The eligible amount that can be put into your RRSP is $2000 for each year of employment before 1996. An additional $1500 can be transferred for each year before 1989 where your employer's contribution to a Registered Pension Plan(RPP) or Deferred Profit Sharing Plan(DPSP) was not vested at the time of retirement or termination. Eligible amounts must be contributed to your RRSP in the year or within 60 days of the end of the year.Question #4:What is the Pension Adjustment (PA) on my T4 and how does it affect my RRSP contribution?Answer: The PA is the value of pension benefits that accrue to members of employer-sponsored Registered Pension Plans(RPPs) or Deferred Profit Sharing Plans(DPSPs). PAs reduce your RRSP contribution limits since you are earning pension benefits through your employer's plans. If you belong to a RPP or DPSP, your employer must calculate your PA and report it to Revenue Canada on your T4 each year. Revenue Canada then takes 18% of your earned income for the year(up to the maximum limit) and reduces it by your PA, to determine the RRSP contribution limit for the following year. Question #5: How is the Pension Adjustment Reversal(PAR) calculated?Answer: The February 18,1997 Federal budget proposes to introduce a pension adjustment reversal(PAR) for individuals who leave registered pension plans(RPPs) or deferred profit sharing plans(DPSPs) before retirement. Under the current legislation, if an individual participates in an employer-sponsored RPP or DPSP, a pension adjustment (PA) and a past service pension adjustment (PSPA) are reported that reduce the individual's RRSP contribution room. The PAR will be measured when an individual ceases, after 1996, to have any entitlement to benefits under a DPSP or RPP. Accordingly, no PAR can be created if a pension is taken instead of a lump sum payment or transfer to an RRSP or RPP. The PAR will equal the excess, if any, of the PAs and PSPAs reported as a result of participation in the plan over the payments received or transferred from the plan with respect to service after 1989. The PAR is then added to the individual's permitted RRSP contribution room in the year of termination. However, the PAR is only effective for individuals who leave their job in 1997 or later. To give administrators and trustees time to adjust to the new reporting requirements, adjustments to RRSP contribution room will not be reported until 1998.Question #6: What happens if I over contribute to my RRSP?Answer: You can make a one-time $2000 over contribution to your RRSP without being subject to a tax penalty. This enables you to shelter the income on the $2000 from tax. Aside from the one-time allowable contribution limit, if your contributions exceed the allowable amount you will be subject to a 1% tax penalty per month to the extent that the over contribution amount exceeds $2000($8000 for over contributions made before February 27,1995).Question #7: When can I contribute to an RRSP?Answer: Contribution room for a given year becomes available on the first day of that year. since the amount is based on information from the previous year, it is fully-determined by January 1st. From this date, you are entitled to contribute this amount to your RRSP without penalty. Realistically however, you may not know your RRSP limit until a few months into 1998. It is based on your earned income for 1997 and the PA value listed on your T4, which normally arrives in February. Also, you'll generally only calculate your earned income for 1997 when you prepare your income tax return, which is due April 30th, 1998. If you rely on Revenue Canada to advise you of your RRSP limit, you'll have to wait until your 1997 tax return has been assessed, which could take several weeks.Question #8: What if I don't use all of my contribution room?Answer: If you contribute less than your RRSP maximum limit, the unused amount is carried forward and can be used in any future year. In the past, RRSP contributors were limited to a carry forward maximum of seven years for unused contribution room. This restriction was eliminated in the 1996 Federal budget. The carry forward rule begins with the 1991 contribution limit. The Notice of Assessment you receive from Revenue Canada shows all unused RRSP contribution room that carries forward from previous years.Question #9: What Canadian investments can I make in my RRSP?Answer: A wide range of investments qualify as Canadian content for an RRSP, including cash (Canadian dollars only); Guaranteed Investment Certificates (GICs); shares listed on Canadian stock exchanges; shares or units of Canadian based mutual funds which meet prescribed guidelines; shares of Canadian corporations which are not listed on Canadian stock exchanges; options on the purchase of eligible investments; most government debt and debt of corporations listed on Canadian stock exchanges.Question #10: Should I hold foreign content in my RRSP?Answer: Up to 20% of the cost of an RRSP portfolio can contain foreign investments, mutual funds included. Canada represents less than 3% of the world's stock market capitalization. That means that by investing your RRSP solely in Canada, you are missing more than 97% of the world's investments. By diversifying your portfolio globally, you automatically increase your portfolio diversification and potential return. Since world markets don't move in unison, a globally diversified portfolio is less subject to individual market or country movements. In addition to reducing the risk level of a portfolio, an international position provides the opportunity to attain higher returns. By limiting a portfolio to Canadian companies, investors are ignoring some of the fastest growing and best producing markets in the world. Over the past decade, foreign stocks have significantly out performed the Canadian stock market on an average annual basis.Question #11: How can I maximize the foreign content of my RRSP?Answer: Mutual funds can hold up to 20% in foreign content and still be qualified investments for RRSPs. Therefore, you could hold 20% of your RRSP directly in global mutual funds and the rest in Canadian funds which have an additional 20% of their assets in foreign property. This would give you an effective foreign investment of approximately 36% within your RRSP. In addition to our global funds, we offer a number of Canadian funds which are mandated to maximize foreign content.Question #12: Can I borrow money to make an RRSP contribution?Answer: Yes. However, interest on money borrowed to make an RRSP contribution is not deductible for tax purposes. If you need funds in order to make an RRSP purchase, and you have eligible investment holdings, you might also consider an 'in-kind' contribution, which allows you to transfer your holdings into your RRSP at market value at the time of the transfer. Keep in mind that an 'in-kind' contribution may trigger a taxable event in the security being transferred. However, if you transfer fixed value securities, such as a money market fund holdings, they will not trigger a taxable event.Question #13: Should I pay down my mortgage before making RRSP contributions?Answer: Some analysts believe that it is beneficial for you to pay off your mortgage first, assuming that the rate of return of your RRSP investments does not exceed your mortgage rate. However, in today's investment environment returns often exceed mortgage rates.WITHDRAWALSQuestion #1: What are the tax implications of RRSP withdrawals?Answer: Income earned and capital gains realized in an RRSP are only taxed when they are withdrawn from the plan. Therefore, tax can play a part in your investment decisions if you have investments inside and outside of your RRSP. From a tax point of view, there is a bias to hold income producing investments inside your RRSP as the interest income would otherwise be taxed at a rate that is higher than the rate for capital gains and dividends. However, for many investors the rates of return in these investments are not a suitable match for your estimated retirement goals.Question #2: What happens to my RRSP/RRIF when I die?Answer: On your death, you are deemed to have collapsed any RRSPs that you have. Therefore, you will be taxed on the fair market value of the plan at the time(unless your spouse is named as the beneficiary). If you die and the assets of your Registered Retirement Income Fund(RRIF) is not payable to your spouse or to a dependent child or grandchild, the fair market value of the plan is included in your income.DEDUCTIBILITYQuestion #1: Can I make an RRSP contribution now and deduct it in a future year?Answer: RRSP contributions can be deducted in the year in which they are made or in any future year.Question #2: What are the advantages of periodic contributions?Answer: You can reduce the money you need to make your contributions by getting the benefit of the tax deduction when you make the contribution. By writing to Revenue Canada and providing them with evidence of your contributions, such as receipts, you will receive a letter which you can give to your employer to reduce the income tax withholdings from your salary. Also, many employers offer group RRSPs, which enable employees to have regular RRSP contributions deducted directly from their payroll into a registered plan. This eliminates the need for the Revenue Canada letter.SPOUSAL RRSPsQuestion #1: What are the benefits of contributing to an RRSP for my spouse?Answer: If you have available RRSP contribution room, you can make a contribution to an RRSP for your spouse(a spousal RRSP). Contributions to spousal RRSPs qualify for a tax deduction for the contributor as long as the total contribution to your plan and the spousal plan do not exceed your contribution limit.Question #2: What happens in the event of a spousal RRSP withdrawal?Answer: If you have made a contribution to your spouse's plan in the current year or in either of the two preceding years, a withdrawal by your spouse from a spousal RRSP is taxable to you for any contributions made during the three year period. This rule does not apply to withdrawals from RRSPs which you have not contributed to. This attribution rule also does not apply if, as a result of the breakdown of your marriage, you and your spouse are living separate and apart pursuant to a Court order or written separation agreement at the time of withdrawal. Also, the rule does not apply if your spouse receives funds from the RRSP in the form of a regular annuity which cannot be commuted. |