Age Limits and Strategies for RRSPs

The age limit at which you’re obligated to wind up your RRSP is 71. By the end of the year of your 71st birthday, you are no longer permitted to have an RRSP. Your options are to cash in your RRSP (not recommended), buy an annuity or open a registered retirement income fund (RRIF). After age 71, if you have earned income and a younger spouse, you may still contribute to a spousal RRSP in your spouse’s name.

Get Rid of Debt and Save for Retirement

Remember your RRSP tax refund is calculated based on your highest marginal tax bracket, which  can be over 50% for high income earners. Your mortgage interest rate is much lower. By contributing to your RRSP and using the tax refund  as a payment towards your mortgage, you win two ways: you accumulate assets for retirement and you attack your debt. Alternatively, you can apply to have your taxes reduced at source based on your regular RRSP contribution by completing and filing the appropriate Canada Revenue Agency or Revenu Québec Forms.  Take that saving and apply it monthly against your debt.

You can over-contribute to your RRSP without incurring a penalty, to a maximum of $2,000 cumulative during your lifetime, which means that your over-contributions cannot add up to more than $2,000 in your lifetime. Though this contribution is not tax-deductible, the investment income earned on the contribution is tax-sheltered, thus the investor gets the benefit of faster compounding.

The $2,000 can be deducted in a subsequent year by treating it as part of that year’s contribution limit. If the $2,000 stays in the RRSP long enough, the advantage of the tax-free compounding outweighs the disadvantage of having un-deducted amounts taxed on withdrawal. For example, let's assume you over-contributed last year by $2,000 and this year, your RRSP contribution limit is $4,000. The first $2,000 of that contribution comes from income and is tax-deductible, and the next $2,000 comes from the previous year's over-contribution and also is tax-deductible.

The disadvantage of maintaining an over-contribution is that while you didn’t get a tax deduction for the over contribution, it will still be taxable when eventually withdrawn.

It may be a good idea to keep the $2,000 over-contribution available in order to take advantage of unforeseen future opportunities. For example, you may be a member of a pension plan that is changing its features to improve benefits to members.   The upgrade may result in a pension adjustment, which could result in an inadvertent over contribution. Therefore, having that cushion could avoid an excess over contribution, which would be penalized.

For any over-contribution made over $2,000, you must pay a penalty of 1% per month on the over-contribution, as long as the over contribution amount remains above $2,000.