Retirement
For those building wealth for retirement, a Registered Savings Plan (RSP) is a tried and true foundation relied upon by many savers. There's good reason for this, as an RSP provides many advantages. But while most of us already know the merits of contributing to an RSP, fewer know of the other potential ways in which you can use your RSP. In this Oaken Blog post, we'll list 5 other things you can do with an RSP, besides simply saving for your retirement.
1. Buy your first home
Let’s start with an easy one, as most savers already know that when buying your first home, you can “borrow” from your RSP to apply towards the purchase. Known officially as the Home Buyer’s Plan (HBP), this one-time program allows you to withdraw up to $25,000 from your RSP when buying your first home.
There are some conditions, of course, including the requirement that the money must be returned to your RSP within 15 years. The Canada Revenue Agency provides a statement that includes a repayment schedule, and failing to meet the yearly minimum results in the outstanding amount being treated as income for the year, and must be declared on your tax return.
You're not required to pay interest on the amount you put towards your home, and there are no penalties for repaying early. However, you should keep in mind that you lose the interest gains the money would have made within your RSP, so using funds from your RSP in this way is not a decision to be taken lightly.
2. Go back to school
The Lifelong Learning Plan (LLP) is similar to the Home Buyer’s Plan, in that it allows you to withdraw money from your RSP to help pay for higher learning expenses. You may borrow up to $10,000 a year for two years for a total of $20,000, and can take up to ten years to repay the funds without interest or penalties. Revenue Canada has more information in the Lifelong Learning Plan section of the main website.
3. Transfer in-kind investments
The RSP contribution deadline is looming and you’d like to make a contribution, but you don’t have the cash on hand to deposit within your RSP. Did you know that you can contribute other investments held outside your RSP, using what's known as an “in-kind” transfer?
However there is a catch, as transferring investments this way is considered a deemed disposition, whereby you are selling the investments and then immediately buying them back within your RSP. The selling price and subsequent contribution amount is calculated using the fair market value at the time of the transfer, and any profit must be treated as a taxable capital gain. And unfortunately, if the fair market value is less than the original cost, you cannot claim a capital loss for income tax purposes. If your intended transfer does involve a capital loss, you might instead consider selling your investment on the open market, and then using those proceeds to complete your RSP contribution. Realizing a capital loss in this manner makes it possible for you to use the realized loss to offset current or future taxable gains.
4. Split income using a spousal RSP
Income splitting is a tax reduction strategy, where one spouse earning considerably more than the other shifts part of their income to the lower-earning spouse, in order to reduce the overall family tax obligation. Making use of a spousal RSP is an easy way to participate in income splitting.
For example, the higher-earning spouse can contribute to a spousal RSP, and will receive a tax rebate based on their higher marginal tax rate. Making use of a spousal RSP also helps to balance retirement income between the two spouses, so that each spouse can withdraw from their own RSP once retired, potentially resulting in less income tax owed as a family.
Balancing income is an important consideration if you plan to retire before the age of 65, and intend to convert your RSP to a RIF (Retirement Income Fund) income. However, once you reach the age of 65, the benefit is essentially eliminated as retirement income derived from RIFs can be freely split between spouses.
5. Contribute to your RSP at source
Are you one of those who rushes around at the last minute to contribute to your RSP, just as the deadline clock is winding down? If so, here’s how you can avoid the deadline stress.
Instruct your employer to deduct a regular RSP contribution from your pay, and have it deposited directly to your RSP. This ensures you are contributing to your RSP throughout the year, and also gives your savings more time to earn rather than waiting until the deadline to contribute a single lump sum.
Regular contributions to your RSP can also reduce your payroll taxes. Consider that when you receive a refund on your annual income tax, you’re really just getting back what you overpaid in taxes during the year. For most of us, our RSP contribution generates the bulk of this refund. And because your employer doesn’t know how much you plan to contribute for the year, there's no way to adjust payroll taxes accordingly. This leaves your employer with no alternative but to withhold the full taxable amount from each pay period.
However, by contributing to your RSP at each pay, your employer is not required to withhold tax for the portion of your salary directed to your RSP. You won’t be able to claim this for a rebate later on, but rather than handing the government the equivalent of an interest-free loan until after you file your taxes, you can pocket that money throughout the year. Better yet, why not direct this “extra” money to your RSP, to build your retirement fund even faster?