RRSP Myths #3 & #4

By Gail Vaz-Oxlade on February 14, 2011
Estimated reading time: 2 minutes

There are a couple of myths on the age front so I’ll cover those together. First there’s the idea that you have to be over 19 to contribute to an RRSP. This misunderstanding came about because people under the age of 19 aren’t allowed to make an over-contribution to their RRSPs.

However, anyone in Canada who has earned income and has filed a tax return, regardless of age, has RRSP contribution room. That includes kids with a paper-route, those who baby-sit, and children who have promising modeling or television careers. Even if there’s little point in a kid claiming the RRSP deduction because she owes little or no tax, the benefits of contributing to an RRSP makes the exercise worthwhile. First there’s the magic of compounding return. A single RRSP contribution of $500 at age 15 compounding at an average return of 5% will grow to more than $5,700 by 65. That’s not so much money Gail! No? Well it’s $5,200 she didn’t have to earn, so how can it not be worthwhile? The second benefit is that since a child’s RRSP tax deduction can be carried forward indefinitely, when she does start working full time, she’ll have deductions she can use to offset the tax on her income. The other age-related myth is that if you’re over 71 you’re out of the RRSP business. Once you turn 71 you can no longer make contributions to an RRSP. If you happen to still be generating earned income, too bad! You’re out of luck. Maybe not. If you’re turning 71 but will continue to have earned income, whether from rental property, a professional practice or business ownership, there’s a way to get a deduction in the year you turn 72, even if you’re not allowed to make an RRSP contribution. In early December of your last year of contribution, make an additional contribution based on your earned income for that year. Yes, that’s technically an over-contribution. And yes, if it’s over the $2,000 lifetime limit, you’ll start incurring the one-percent-per-month fee. But that’ll only happen until the calendar clicks over to the new year, so that means only one month’s worth of penalty. Now, even though you’re not allowed to make a contribution, you can claim the deduction for the contribution that you made last year. This could also help reduce your exposure to the OAS clawback by reducing your taxable income. Just remember not to get greedy. Don’t reduce your income to such a low point that you bring the alternative minimum tax into effect. Also keep in mind that contributions to a spousal RRSP are based on your partner’s age. So even if you are an old geezer, as long as your partner is under 71 you can contribute on his or her behalf and grab a deduction.