RRSP Myths

National Post


Think you know everything about RRSPs? Here are four myths worth debunking.

1. RRSPs are better than TFSAs since you only get a tax deduction when you contribute to an RRSP, not a TFSA.

Sure, you get a tax deduction and potential refund when you make a deductible RRSP contribution but that's only potentially beneficial to you if you expect your marginal effective tax rate upon withdrawal of the funds to be lower than your tax rate is today. In other words, that "refund" you receive in respect of your contribution is meaningless if your tax rate stays constant between the time of contribution and withdrawal. If your tax rate is expected to increase upon retirement, you would have been better off socking the money away in a TFSA before considering an RRSP contribution.

2. If you're over 71, you can no longer contribute to an RRSP.

While it may be true you can no longer contribute to your own RRSP once over 71, you can still contribute to a spousal RRSP if you have younger spouse. This would only be applicable if you have RRSP contribution room, either because you haven't contributed the maximum allowed during your working years or you generate new room annually from employment or rental income, both of which count as "earned income."

3. You must be over 18 to contribute to an RRSP.

You must be 18 to open a TFSA but you can contribute at any age. Kids under 18 who earn money through part-time or summer jobs should be encouraged to file a tax return to demonstrate their earned income to the Canada Revenue Agency, creating RRSP contribution room. They can then choose to either make an RRSP contribution with their summer earnings or, at the very least, build up that RRSP contribution room for use in future years. Note that just because they are making an RRSP contribution today, even when their income may be well below the amount at which they must pay tax ($10,822 for 2012), they don't have to claim that RRSP deduction in the year of contribution. (See myth No. 4.)

4. You must report and claim your RRSP contribution annually or face a penalty tax of 1% per month.

While you do need to report all 2011 RRSP contributions (including those made in the first 60 days of 2012) on your 2011 tax return, you do not need to claim the deduction in the year they are made. Provided you have the necessary RRSP room, you will not be penalized for overcontributing if you don't claim the deduction. That being said, it rarely makes sense to defer claiming the deduction unless you are certain your marginal tax rate for a coming year will be significantly higher.