RRSP Tips for people between Age 40-60

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The years have passed. Your life has evolved and changed. Now you are 40 or beyond. The mortgage is close to being paid off, your incomeis higher, and your debts are lower.

You are now moving from managing debt to building wealth. At this time in your life, it is important to put as much money as possible aside for the future, both inside and outside your RRSP. Tax planning for your retirement years also becomes an important priority.

Here are some things you should be looking at during this stage.

Maximize contributions – Ideally, you have been making yourmaximum  allowable RRSP contributions all along.  If you haven’t, now is the time to start.

You should also catch up on any unused carry-forward entitlements. If you did not make your full RRSP contribution in any year from1991 on, you can make up the investment at any time.

Here’s a special tip. If you don’t have  the cash to make your maximum RRSP contribution,consider borrowing the money. Special RRSP loans are available at very attractive interest rates.

Tax-saving strategies – From a taxation perspective, the worst situation is to  have one spouse with very high income and the other with little or none after retirement. Dividing income more evenly usually produces a lower combined tax bill.

You can split RRIF income, for tax  purposes, with your spouse if you are  65 or older. To create the flexibility to  split income prior to 65, consider having the higher income spouse contribute to a spousal RRSP.

Tax-efficient investing – Capital gains  and Canadian dividends are subject to a lower tax rate than other sources of income. Any income withdrawn from  an RRSP is fully taxable at your top  marginal tax rate. In keeping with your asset allocation plan, it makes tax sense to hold any interest-bearing investments inside your RRSP – since they are 100% taxable – and hold investments that produce Canadian dividends and capital gains outside your RRSP. We can help you to create a tax-efficient investment plan that’s right for you.

Resist the temptation to dip into your RRSP –  Usually, there is nothing to prevent you from accessing the investments in your RRSP before retirement. However, you should consider the consequences before you do so.

First of all, withdrawals are taxed at  your marginal rate, and are subject  to withholding tax of 10% to 30%at  the time of withdrawal. Secondly, you cannot restore the contribution room. The amount that you can contribute to an RRSP in your lifetime is limited and a withdrawal erodes some of this potential.

The Home Buyer’s Plan and the Lifelong Learning Plan are two exceptions.  They allow tax-free withdrawals with  the ability tore-contribute. However, even in these plans there is no ability to replace the tax-deferred growth on your investment that was lost when you did the RRSP withdrawal.