Did you know that the RRSP exists because of Canadian physicians? (This you don’t need to know — it’s just good to know.)
Since most physicians are self-employed and without a pension plan, they have to plan ahead to ensure they can retire comfortably. More than 60 years ago, the Canadian Medical Association realized that Canadian physicians needed some help and lobbied the government for a tax-effective solution for saving for retirement — and the registered retirement savings plan, or RRSP, was born.
Since then, the RRSP has become an essential account for many Canadians. Here are some practical things you need to know about RRSPs.
- The RRSP contribution deadline
If you want to deduct your annual RRSP contribution on your 2019 income tax return, the last day to contribute is Monday, March 2, 2020. There are no exceptions. Most financial institutions, including MD Financial Management, have extended hours at the end of RRSP season, but it’s best not to wait until the last minute.
B.C. physicians: If you’re a practising physician in British Columbia, you can apply for a matching contribution from the Contributory Professional Retirement Savings Plan (CPRSP). The deadline to apply is January 20, 2020. Note that if you want the matching contribution, the deadline for your RRSP contribution is also January 20, 2020. New physicians (in their first five years of practice) can get the CPRSP benefit without making an RRSP contribution.
- How to create RRSP contribution room if you’re incorporated
If you have a medical professional corporation, you’ll need to pay yourself a salary to get the RRSP contribution room. Dividends do not generate RRSP contribution room. Your accountant and financial advisor can help you figure out how much to pay yourself.
- The maximum amount you’re allowed to contribute
This depends on your earned income. To find out how much you can contribute, check your online Canada Revenue Agency (CRA) account or the notice of assessment you received from the CRA after filing your 2018 tax return.
Most Canadians don’t contribute the maximum annual amount to their RRSPs. The median contribution hovers around $3,000. The good thing is that if you don’t contribute your maximum amount, the “unused contribution room” carries forward indefinitely.
- What your contribution gives you in tax savings
The higher your tax bracket, the more your RRSP contribution reduces your tax owing. In this fictitious example, let’s say Dr. Arthurs, an anesthesiologist, works part-time and earns employment income of $100,000 a year. When she contributes $10,000 to her RRSP, her taxes will be reduced by approximately $4,000.
Her friend Dr. Kinloch earns $200,000 of employment income. She will get approximately $4,800 in tax savings when she contributes the same $10,000.
Source: Ernst & Young 2019 RRSP savings calculator. Note: For this example, we’ve assumed that both physicians work in Ontario. The numbers have been rounded.
Whatever your RRSP contribution generates in tax savings, you end up with more money to contribute to your RRSP in a future year, resulting in a kind of snowball effect.
- A spousal RRSP can reduce household taxes in retirement
If you’re the bigger earner in your household, you can contribute to a spousal RRSP (if they have contribution room) on their behalf and claim the deduction on your tax return. In retirement, because it’s your spouse who draws down those funds instead of you, it’s a way to split your RRSP income. This helps reduce your overall tax liability in retirement.
Income splitting is essentially about paying less tax. Let’s assume you and your spouse have converted your RRSPs to registered retirement income funds (RRIFs).
In the first scenario below, the RRIF income goes to you alone. In the second scenario, the RRIF income is split between you and your spouse. When you split the income, total taxes are $13,100 less.
This example uses average tax rates and is for illustrative purposes only.
- If you borrow from your RRSP, you’ll have to pay it back
You can withdraw money from your RRSP to take advantage of the Home Buyers’ Plan (up to $35,000 per person or $70,000 per couple). But you have to pay it back over the next 15 years. Because you’re merely putting the money back into your RRSP, you won’t get a tax deduction as you would with a regular RRSP contribution. If you don’t put the money back in your RRSP, 1/15 of the amount is added to your income each year and you’ll have to pay tax on that.
- A spouse or dependant is a wise choice of RRSP beneficiary
Who will you leave your RRSP to when you die? Here’s an important fact: If you name your spouse, common-law partner, financially dependent child or grandchild, or disabled financially dependent child or grandchild as the beneficiary, you can roll it over to their RRSP tax-free.
Note: If your financially dependent child or grandchild is not disabled, then an annuity to age 18 must be purchased with the proceeds of your RRSP. Otherwise, the fair market value of your entire RRSP is included as income on your final tax return after you die, where it could be taxed at 50% or more.
In Quebec, you cannot name beneficiaries on RRSP applications. This has to be addressed in your will.
Thoughtful planning and advice from MD Financial Management can help you save more and rest easier. Contact an MD Advisor* today to make the most of your RRSP contribution.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.