Here’s Relief for April 30

Does April 30^thdrain you?  It’s the annual income tax filing deadline.  If you would like to effortlessly put money back into your life before the deadline, here are some solutions for you.

Figure out if you are going to owe money this year.  If the answer is yes, consider these possibilities.  Look towards tax deductions.  Now that the year is over, the final remaining tax deduction is your RRSP.  That’s right.  We are too busy in December and would rather think of Santa Claus than the Grinches in Ottawa. But there is still time. You have until March 1^stto make an RRSP contribution.  The common question is how much.  A simple rule of thumb is 10% to 15% of your gross income.  “Right, Alynn, I can’t afford that.”  Well then, do the next best thing, put in what you can afford and consider taking out an RRSP loan.  If you’re getting money back, a loan makes complete sense. Borrow the money now, get it back in April, and pay off the loan.  Simple math and easy to do, unless of course you enjoy sending cheques to the government.

The next argument is, “I heard RRSPs aren’t’ that great anymore.”  Now I’ll stop that argument with, “If I could only guarantee you 25% to 40% return on your money immediately, would you invest? Where else can you invest and do that?”

An RRSP provides you with a tax deduction for this coming April; and while the money grows, it is tax-sheltered.  When you retire, you only pay tax on what you take out; and you’re in control of that until you are age 71, when you have to take out a certain amount each year.

Only in Canada, eh?  Pity.  Other countries don’t have a generous RRSP program, yet only 5% of Canadians maximize their RRSPs every year.  Go ahead, be a skeptic, pay the Government.  After all, it’s only money.

Is your RRSP Locked In?

Another common error is misunderstanding locked-in RRSP.  Individuals with money in locked-in RRSPs usually find themselves waiting too long to use the money and finding out that they cannot take out from the plan as much as they expected.  If you have money in a locked-in RRSP, there are a few strategies you can use to get the maximum amount of money out earlier. Before you transfer your locked-in RRSP to a LIF, LIRA, or LRIF, check which will pay out the most over your lifetime.  Each provincial pension plan has different rules and Federal pensions are also distinct.

As early as possible, plan to take out the annual maximum.  This is 55 years of age, if the funds are from an Ontario pension plan.  If the funds are from another province, you may take it out earlier; for example, the age in Alberta is 50.  Once you transfer to a LIF or LRIF plan to take out the maximum available each year, Provincial pension legislation calculates a maximum amount that can be withdrawn.  If the maximum is not withdrawn, it continues to be locked in.  If the maximum is not withdrawn, it continues to be locked in. All withdrawals are included in income for the year and are subject to tax.  However, if you are still working, you can withdraw the maximum from your locked-in RRSP and contribute those funds into a regular RRSP, therefore not attracting any tax and unlocking funds each year.  This works for anyone under age 70.

Once the money is in an RRSP, you can withdraw any amount at any time. This gradually unlocks your money over time, and you can do this each year.

If you have a small locked-in plan, you can transfer it to a regular RRSP and take it out at any time.  The definition of “small plan” changes and varies by province, but it is targeted for plans approximately $16,400 and less.  Keeping up with each provincial change is challenging but ask your sponsoring plan administrator or financial professional.  Plan to unlock as much as possible as soon as possible, knowing how can enhance your retirement income flexibility. Visit the provincial web site for the latest updates and tax changes.