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Seventy-one and Earning an Income? – You May Still be Able to Make an RRSP Contribution

Written on February 15, 2012 at 9:41 am, by admin

If this is the year you turn 71, you may be fully into the swing of things as a retired person, or maybe you’re just “somewhat” into the swing of retirement as you have decided to continue working (perhaps on a part-time basis). You enjoy your work and the extra cash flow is nice. However, your financial advisor has let you know that since you are 71 it’s time to make some choices about your RRSP (Registered Retirement Savings Plan). You can either withdraw the full amount as cash and incur a potentially hefty tax burden, transfer it to an annuity or a Registered Retired Income Fund (RRIF), or do some combination of all three.

Multiple Sources of Income

You could potentially have money coming in from your government pensions, your company pension, your job, investments and from your RRSP. As a result, you may be in a higher tax bracket, resulting in your Old Age Security (OAS) payments being partially or fully clawed back. Is there anything you can do to help offset some of this tax burden? You still have earned income and want to continue to make a contribution to your RRSP….Is this still possible?

Well, if you’re turning 71 in 2012, you’ll have to the end of the year to wind up your RRSP. However, you may still be entitled to RRSP contribution room in 2013 if you have earned income in 2012. Consider making your 2013 RRSP contribution in December of this year. You will face a one percent penalty per month on the over-contributed amount that is in excess of the $2,000 allowable limit. The good news is that the overall tax savings from your RRSP deduction in 2013 should be greater than the small penalty you will have to pay.

Contribute to Your RRSP After Age 71

Dianne, a family therapist, continued to work into her 71st year and in doing so, was able to qualify to make an RRSP contribution of $20,000 for the following year. However, Dianne is supposed to wind down her RRSP by the end of her 71st year. What should she do?

Well, Dianne could make the $20,000 contribution to her RRSP in December of her 71st year. This would mean that Dianne would have over-contributed to her RRSP. Under the existing rules, Dianne would incur a one percent per month penalty on any over-contribution above the $2,000 allowable amount. So Dianne’s over-contribution of $18,000 ($20,000-$2,000) would be subject to a one percent penalty for the month of December, or $180.00. In January 2013, the penalty would drop off as Dianne would now have an allowable contribution limit of $20,000 for 2013 based upon her earned income from the prior year.

If Dianne is entitled to receive 40 percent tax rebate on her contribution, this would mean that for a penalty of $180.00, Dianne would receive an $8,000 tax refund. In this instance, paying the penalty makes sense.

Dianne might also consider contributing to a spousal RRSP if she is married to someone under the age of 72 and continues to have earned income well into her 71st year. She could also take advantage of the same over-contribution strategy in December of her spouse’s 71st year.

If you are entering into your 71st year and have earned income which qualifies you for the RRSP contribution deduction, consider this strategy. Talk to your financial advisor or accountant to make sure it is right for your particular situation first. Don’t forget to discuss other tax savings options with your financial professional, such as splitting your qualified pension, annuity or RRIF income with your spouse, as well as the $2,000 pension income tax credit.