Overcontributing to your RRSP

If you will have “earned income” after age 69, you may wish to consider overcontributing to your RRSP before your RRSP maturity option deadline

Contributing in advance so you can use up future RRSP contribution room

Keep in mind that if you turn 69, 70 or 71 in 1997, then you must choose an RRSP maturity option before December 31, 1997. If you don’t select an RRSP maturity option, Revenue Canada requires that your RRSP be redeemed, with the entire amount becoming fully taxable. RRSP maturity options include the transfer of your RRSP funds to a RRIF, an annuity or a combination of the two.

Here is a summary of the main issues surrounding this particular tax planning opportunity:

Nowadays, many people in retirement still have earned income through a professional practice, consulting contract, small business etc. It should be noted that directors’ fees and net rental income also qualify as earned income. As long as you have earned income for RRSP purposes, you can contribute to your own RRSP any time before the end of the year you reach age 69 (if you turn 69, 70 or 71 in 1997, there are special transition rules which allow you to contribute to your RRSP up until Decem 31st, 1997). After your deadline for “RRSP maturity options” you can still make eligible RRSP contributions to your spouse’s RRSP as long as your spouse is under age 69. What you might not realize is that even though you cannot make RRSP contributions to your own RRSP after your RRSP maturity option deadline, you can make an RRSP overcontribution before your RRSP maturity deadline (think of it as contributing in advance). Keep in mind that any overcontributions in excess of $2,000 are subject to a penalty of 1% per month.

If you will have earned income after age 69, you may wish to consider the following:

  • Making the $2,000 overcontribution before your RRSP maturity option deadline (there would be no 1% penalty to worry about). You could then claim a $2,000 deduction against earned income in later years.

  • Overcontributing beyond the $2,000 limit. The penalty is applied at the end of each month, therefore, if you overcontributed on December 1 of the year you turned 69, you should only have one month’s penalty. The penalty would cease to apply as of January 1 of the year you will turn age 70 because your new RRSP contribution room would cancel out the overcontribution.
  • Example of a Consultant turning 69 in 1997 who continues to earn $85,000 per year.

     199719981999
    Contribution room:$13,500$13,500$13,500
    December 1st RRSP contribution:$29,000N/AN/A
    Total accumulated overcontributions:$15,500$2,000NIL
    Allowable overcontribution:($2,000)($2,000)($2,000)
    Overcontributions subject to penalty:$13,500NILNIL
    Penalty @ 1% per month:135NILNIL
    Tax Deduction:$13,500$13,500$2,000

    Please contact your Merrill Lynch Financial Advisor for the Special Report “Retirement Savings Guide” which includes information on RRSP overcontributions, as well as Spousal RRSPs (concepts and pitfalls).

    The information contained herein was obtained from sources believed to be reliable, however, the accuracy is not guaranteed.

    Financial Tips courtesy of Merrill Lynch Canada Inc.