Readers’ RRSP questions answered
Why do I seem to have so little RRSP room this year, asks one puzzled reader.
Either you didn't make any money or you're in a really good pension plan. Chances are, it's the latter. First off, check your Pension Adjustment — a number that puts everyone on an equal footing in terms of annual RRSP contribution room.
Designed to reflect the value of the pension benefits you've built up in the company plan, it reduces your annual RRSP contribution limit since you're already earning pension benefits at work.
Your employer is required to calculate your PA and report it to the CRA on your T4 each year. The CRA then takes 18 percent of your earned income for the year (up to the maximum limit) and reduces it by your PA to determine your RRSP contribution limit for the following year.
Another anxious reader wonders how much she should contribute to her RRSP this year?
There's no hard and fast rule. The goal for most people is to contribute enough so that when you retire, you can maintain a similar lifestyle to what you currently enjoy. Although there's considerable debate about the exact percentage, most experts suggest that you'll need 60 to 70 per cent of your current income to accomplish that.
The maximum you can contribute each year is 18 per cent of your income, and if you're managing anything close to that, you're in great shape. Realistically, assuming you're not carrying stacks of debt, contributing 10 to 12 per cent of your pre-tax income each year is a good target.
With most of the family's RRSP money in a spousal plan, another reader wonders what happens if that spouse passes away?
When the owner of an RRSP dies, the full value of the RRSP is generally included in the deceased's income. However, where the beneficiary is the surviving spouse, the RRSP can be rolled over to his or her account on a tax-deferred basis — bypassing the estate and reducing probate costs. This means the surviving spouse won't have to pay tax on the funds until they're withdrawn.
A concerned investor wants to know how much of a tax deduction to expect if he uses up both current and past contribution room.
The total contribution will be deductible. If you're in the highest tax bracket, you might see as much as a 46 percent reduction in tax, depending on the province you live in. Chances are that you're in a lower bracket though.
If you don't have enough income to make deducting the entire amount worthwhile, you can carry it forward and deduct in a subsequent year.
Why wait? Because you think your income, and therefore your tax bracket, is likely to go up in the future. This might include a young physician completing a residency, for instance.
The real question: how much should you contribute now, and how much should you deduct now? For someone in Ontario, a sizeable contribution might reduce their marginal tax bracket from 46 per cent to the lowest 20 per cent bracket. This means that some of the contribution only produces half of the refund produced from the first dollar of contribution.