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It may not be a good idea to save up unused RRSP contributions in order to save on future RRSP withdrawals. Here’s why.
I have $66,000 unused RRSP contributions for the 2023 tax year (unused deductions, not unused contributions).
My plan is to start my RRSP withdrawals in January 2025, and to start claiming the unused deductions on my 2025 taxes, when most likely it will be over $70,000. In 2025, I will be 66 years old.
What is the last tax year I still can claim unused deductions? Is it 2029 or 2030?
—Svetla
Before delving into your question, Svetla, it may be helpful for other readers to highlight the difference between registered retirement savings plan (RRSP) deductions, deduction limit, contributions and contribution limit. They can be a cause of confusion.
When you contribute to an RRSP, you must claim the contribution on your tax return for the year. That is, you report the fact that a contribution was made. You do not, however, have to deduct that contribution. You can choose to carry it forward to claim in a future tax year.
On your notice of assessment, there are three primary RRSP-related line items:
Your deduction limit means how much you can deduct for the year. Your unused contributions are previous RRSP deposits not yet deducted. These unused contributions reduce your available contribution room. So, if you have a $20,000 RRSP limit, but $5,000 of unused RRSP contributions from the past that you have not yet deducted, your available contribution room is only $15,000.
Your available contribution room is how much you can contribute to your RRSP today. You are allowed to overcontribute by up to $2,000, so there is a bit of a buffer. However, if you exceed that $2,000, you are subject to a penalty of 1% per month.
The $66,000 of unused RRSP contributions you have, Svetla, is pretty significant. It’s one of the larger carry-forwards I have come across. It represents tax deductions and potential refunds you have delayed.
You can carry forward your unused RRSP contributions indefinitely. They do not expire at age 71, when you would otherwise have to convert your RRSP to a registered retirement income fund (RRIF). It’s uncommon to carry unused RRSP contributions forward, but sometimes it makes sense, say when you’re going to have a much higher income year the following year. Your RRSP deduction may save you more tax if you save it for that subsequent year.
Svetla, it sounds like you are building up your unused RRSP contributions with the intention of using them to offset the tax on your future RRSP withdrawals. This may not be advantageous.
If you’re working and your income is higher now than when you retire, your RRSP deductions would save more tax today than in the future. Unless you expect your tax rate to be much higher later, you are probably better off claiming the deductions now. Furthermore, even if your tax rate was modestly higher in the future, by waiting several years to get those tax savings, it may not be worth it. If you could save 30% today or 35% in a few years, it may still be better to save 30% today just to get that refund in your pocket to do something else with it, like invest it or pay down debt. This is the “time value of money.”
Svetla, it sounds like you have a good understanding of your unused RRSP contributions and how you can save them up to deduct in the future. Make sure there is a compelling reason like being in a much higher tax bracket when you intend to deduct them. If you do not expect to deduct the contributions for many years, the tax differential between your current and future tax rate should be pretty significant to justify waiting.
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I heard if at 65 you are not taking CPP and that you could use your unused deductions to lower income enough to qualify for GIS?
I respectfully disagree. While for high tax bracket incomes’ you are right, but not for low tax bracket incomes. You can use the unused RRSP contributions to lower you income to the point that you qualify (or get more) GIS.
This is one of the very few tax strategy for the low income people close to retirement.
Without Svetla’s income, tax jurisdiction and retirement plans, it will be impossible to do a right tax planning.
Would you use a future RRSP deduction to assist with capital gains or similarly can you comment on holding onto capital losses? If you know you have a large gain coming due for example to selling a rental property is it worth hanging onto loses if income if relatively the same or can be kept lower based on riif income withdrawals?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I hold onto RRSP deductions to use in order to lower my income to qualify for the GIS. I am 68 and will do that until my deductions are used up.
That will probably be when I’m 72 and have to start pulling money out of my RRIF, but in the meantime, I’m getting a bit of extra money each month to help stretch the pension money.