RRSP rules refresher

I wrote The RRSP Answer Book (now out of publication) almost 20 years ago. Geez, I’m getting old! Back then, no one understood what an RRSP was and I spent a lot of time saying the same thing over and over. Sadly, I still meet people who don’t know the RRSP rules. So here’s a quick refresher.

The deadline for RRSP contributions is always 60 days after the end of the previous year if you want to be able to claim the deduction for the previous tax year. Since 2012 is a leap year, the deadline is February 29.

Keep in mind that a contribution made in the first 60 days of 2012 can be applied against your 2011 income or any income you earn in 2012 and beyond.

If you’re turning 71 this year, this is the last year you can contribute to your own RRSP since you must convert your RRSP by December 31. However, if you have a younger spouse, common-law or otherwise and you continue to have earned income, you can contribute to a spousal RRSP up until your partner turns 71.

Anyone who has earned income, a social insurance number and files a tax return can contribute to an RRSP up until the end of the year they turn 71 (or their spouse turns 71 in the case of a spousal plan). Kids CAN have an RRSP although they can’t have a TFSA until they’re 18. If you make a contribution when you don’t have to pay any tax (or very little tax) don’t claim the deduction. Hold it for later when your income and your tax rate go up so you get a bigger bang for your buck.

You can contribute the lesser of 18% of your earned income from 2011, or the maximum annual contribution limit. If you’re contributing for the 2011 tax year, your maximum is $22,450. If you’re contributing for the 2012 tax year, your maximum is $22,970. If you belong to a company pension plan, your RRSP contribution limit is reduced by a pension adjustment or PA. The PA represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan.

Review last year’s Notice of Assessment. It will show you both your 2012 contribution limit and any unused contribution room you may have built up. Can’t find your Notice of Assessment? Call the TIPS number (blue pages in your phone book under “tax services”); have your SIN and last tax return handy.

For most T4-grunts, your “earned income” is the amount that shows up in box 14 on T4 slips. If you’re self-employed, it includes your employment income after expenses have been deducted. If you’re a landlord, it includes your net rental income. And if you’re getting CPP/QPP disability payments, those count too. What doesn’t count? Investment income, pensions and retiring allowances, death benefits, taxable capital gains and limited-partnership income aren’t included.

What if you don’t have any cash to contribute? You don’t necessarily need cash to make an RRSP contribution. You can contribute a security, like a mutual fund, stock or GIC you already own to a self-directed RRSP. The contribution is equal to the fair market value of the security when you stick it into the RRSP. The security is deemed to have been disposed of—meaning that it’s treated as if you SOLD it to the RRSP—at time of contribution, and this can have tax consequences, so check with your tax advisor.