Consider these helpful tips and benefits.
– Consider the preferred tax treatment for dividends and capital gains on investments held outside your RRSP when determining which types of assets to hold inside your RRSP. Be sure to take into account the new lower tax rates on eligible dividends.
– Consider a spousal RRSP for retirement income splitting if you expect your spouse’s retirement income to be lower than yours. Keep in mind that your retirement income from your matured RRSP may qualify for new spousal income splitting rules. Especially relevant if you’ve run out of contribution room.
– A spousal RRSP may also provide an opportunity for a longer period of tax-free growth for your contributions if your spouse is younger than you are.
– Make your maximum allowable contribution to enhance your tax management. You can contribute 18 per cent of your “earned income” in 2005 or $18,000, whichever is less (if you’re a pension plan member, your maximum contribution may be reduced). Of course, the point is to get more money to retire, not to lessen taxes. More money earlier means more money coming out.
– Getting close to retirement? Consider options for maturing your RRSP and remember to make your final contribution by December 31, 2008. You should be thinking about maturing 5-7 years before your retire, slowly moving your money away from RRSP and into GICs or similar investments.
– Consider Home Buyer’s Plan withdrawals to buy your first home or Lifelong Learning Plan withdrawals to advance your training or post-secondary education, but be sure to weigh the loss of RRSP growth. Of course, when you do this you’ll loose the growth of the RRSP.
If your income is taxed at the top rate (i.e., about 46 per cent, depending on your province), your RRSP deduction will create current tax benefits of about 46 per cent of the amount you contribute. If your income falls into one of the lower three brackets in 2006, the deduction will be worth proportionally less: about 42 per cent of the amount you contribute if you are in the third bracket, about 34 per cent if you are in the second bracket, and about 23 per cent if you are in the lowest bracket. In light of the different marginal tax rates, keep in mind the following tax planning ideas:
– In a low-income year, consider making your maximum possible RRSP contribution but deferring claiming the deduction until a later year when your income is taxed at a higher marginal rate. This strategy can help enhance the tax-free growth of funds while also enhancing your tax benefits.
– Large RRSP catch-up contribution, consider only claiming enough of the resulting deduction to reduce your taxable income in the top tax brackets. You can carry forward the remaining deduction for greater tax management in a future year against income that is taxed in the higher tax brackets.