Myth 3: If you are over 69 you are out of the RRSP business.
Current legislation says that once you turn 69 you can no longer contribute to an RRSP. Still generating income? Too bad; your out of luck. Or maybe not. If you are turning 69 but still have income, whether from property, a professional practice or a business, there is a way to get a deduction for at least one more year.
In early december of your last year to contribute, put in an additional amount, based on your earned income for that year. Yes, technically, that is an over contribution. And, yes, if it puts you over the $2000 lifetime limit, you start incurring a 1% per month fee. But that only applies until the year clicks over, meaning only one month penalty. Now, even though you are not allowed to make a contribution, you can take a deduction for the contribution you made last year. This may also reduce your exposure to the OAS clawback by lowering your taxable income. Just don't get greedy. You can't cut your income to the point where the alternatiive minimum tax kicks in.
Also, keep in mind that contibutions to a spousal RRSP are based on your partner's age, not yours. so even if you are an old geezer, as long as your partner is under 69 you can contuibute on his or her behalf and take a deduction
Myth 4: You can't use your RRSP as collateral for a loan.
OK, technically, this is a myth but one with some basis. You may use funds in your plan as loan collateral, but there can be negative consequences for doing so. If you borrow against your RRSP, at the end of that year you must include the fair market value fo the RRSP assets involved as part of your taxable income. When the plan's assets are no longer pledged when you've paid off the loan or found other collateral you can deduct the amount previously included as income, minus any loss resulting from the use of the plan's assets.
So why would a person do this? Well, let's say you suddenly find yourself without a job and needing to take some money out of your RRSP to keep body and soul together. Once you do that, there is no way to put that money back into the plan. Even if you work yourself out of the cash-flow squeeze, what is withdrawn stays withdrawn and that's that.
But suppose that instead of taking cash from your RRSP, you use the plan as collateral At the end of the year, if the loan is still outstanding, the CCRA treats the RRSP money as if it had been deregistered and includes it in your income. However, if your cash-flow crunch eases and you pay off the loan before tax time, you remove the collateral obligation. The CCRA regards your RRSP funds as once again tucked away and you lose nothing.
Myth 5: Doesn't matter when you buy a Spousal RRSP.
The spousal RRSP withdrawl rules are based on calendar years, not tax years or RRSP deadline years. Make a contribution for 2002 by December 2002, and then no further contributions, and you will be able to withdraw money attributed only to the plan holder as early as January 2005. Withdrawls are taxed based on the planholder.
Keep in mind that contributions to a spousal RRSP are based on your partner's age, not yours. As long as your partner is under 69 you can contribute on there behalf and take a deduction
