How To Get Around The RRSP Age Limit
Fee-for-service financial planner and founder of PlanEasy.ca
Did you know that there is an RRSP age limit? After a certain age you can no longer contribute to your RRSP. This is the same age limit that requires you to convert your RRSP to a RRIF.
The rule is, by the end of the year you turn age 71, you must convert your RRSP to a RRIF and you can no longer make RRSP contributions.
It doesn’t matter if you turn age 71 in January or in December, by the end of that year no more personal RRSP contributions can be made and the RRSP must be converted to a RRIF.
Interestingly, although you can’t contribute to a personal RRSP you can continue to earn RRSP contribution room after age 71. If you earn employment income at age 71 or beyond, then you’ll also earn more RRSP contribution room at the typical rate of 18% of earned income.
Seems odd, doesn’t it? You can earn RRSP contribution room after age 71 but you can’t use it (unless you’re in a specific situation which we’ll talk about below).
Similarly, if you have lots of unused RRSP contribution room, this will also carry forward past age 71 too. You might have RRSP contribution room available to use, but you won’t be able to contribute to a personal RRSP.
If you can’t use this RRSP contribution room then why does the CRA track it at all?
Well, there are a few things that can be done to get around the age limit for RRSP contributions and, in the right situation, this could provide some large tax reductions and/or government benefit increases.
Maximum Age For RRSP Contribution
The maximum age for an RRSP contribution is the end of the year you turn age 71. At this point the government forces you to convert your RRSP to a RRIF and contributions to a personal RRSP are no longer allowed.
This means in the year your turn age 72 you can no longer contribute to your RRSP and minimum RRIF withdrawals must begin.
So, what options do you have to use a RRSP contributions after age 71?
Option 1: Using Unused RRSP Contributions After Age 71
Although you can’t make a new RRSP contribution after age 71, any unused RRSP contributions that you’ve made previously but carried forward will still be eligible for deduction after age 71.
After age 71 you can deduct any unused RRSP contributions up to your deduction limit on your Notice of Assessment.
What that means is that if you make a very large RRSP contribution before age 71, assuming you have contribution room, you can carry forward that contribution and make a deduction in a future year.
This might be interesting if you expect a large capital gain at age 72 or 73, perhaps due to the sale of a cottage, vacation property, or rental property, or if you expect to have additional employment income after age 71. A large RRSP contribution could be made at age 71 and the deduction used in the future at age 72, 73, 74+.
Option 2: Making An Excess RRSP Contribution At Age 71
If you’re still working in your early 70’s, and you have “earned income” the year you turn age 71, then this income will generate RRSP contribution room the following year.
But, as we discussed above, in the year you turn age 72 and beyond you can no longer use that new RRSP contribution room.
Is that RRSP contribution lost forever? Not quite, there is the option of making an excess contribution in December of the year you turn age 71.
Let’s say you earned $20,000 in employment income at age 71. The following year at age 72 you would have RRSP contribution room of $3,600 (18% of $20,000).
In this situation an excess RRSP contribution of $3,600 could be made in December of the year you turn age 71 in anticipation of that new RRSP contribution room being available the following year.
Technically you will have over contributed to your RRSP for one month in December, which will incur a 1% penalty for the month of December, or in this case about $36, but you’ll be able to deduct that RRSP contribution at age 72.
Using this option requires anticipating the new RRSP contribution room that will be earned. Making the wrong calculation could result in an over contribution, so be careful when using this option.
Option 3: Using A Spousal-RRSP
Although you can’t contribute to a personal RRSP after age 72, you can contribute to a younger partners spousal-RRSP.
Couples with an age gap can take advantage of this strategy. When partners aren’t the exact same age, they should be thinking about this strategy (or other strategies/opportunities related to couples with an age gap like GIS Allowance).
An RRSP contribution can be made after age 72+ as long as the younger partner is age 71 or younger. This will use the older partners RRSP contribution room even though they are age 72+. This will allow RRSP contributions to continue until the younger partner turns their spousal-RRSP into a spousal-RRIF.
Be warned though, all the typical rules for spousal-RRSPs still apply, so income can be attributed back to the older partner if spousal-RRSP withdrawals aren’t planned carefully.
This option can be very attractive in two situations…
Opportunity for low-income couples:
A lower income couple can benefit from this strategy because it allows additional RRSP contributions to be made which can help maximize government benefits like GIS. (Related: See this example of how RRSP contributions can help maximize gov. benefits like GIS)
RRSP contributions are a great way to boost GIS benefits and this strategy can help boost GIS benefits even longer.
Contributions could be made to both a spousal-RRSP by the older partner and to a personal RRSP by the younger partner. Couples with an age gap, and with lots of RRSP contribution room, could continue to maximize GIS until both partners are age 72+.
Opportunity for a high-income earner still working after age 72:
An older partner who is also a high-income earner can benefit from this strategy too. Spousal-RRSP contributions can be made by the high-income earner until both partners are 72+.
This will allow both old and new RRSP contribution room to be used past age 72 and will provide a tax deduction to reduce income tax for the high-income earner. This can continue until both partners are age 72+.
How To Get Around The RRSP Age Limit
Although personal-RRSP contributions are not allowed after a certain age there are a few ways around these rules. Whether or not these options should be taken advantage of will depend on the specific situation.
Deciding to add more to an RRSP will depend on current marginal effective tax rates versus future marginal effective tax rates. This will depend on personal circumstances, other sources of retirement income, eligibility for government benefits, and future retirement drawdown plans.
Although this type of financial planning may not apply to everyone, the benefit in some situations can be $1,000s to $10,000s or more, so it quite literally pays to make a detailed plan.
Financial planner, personal finance geek and founder of PlanEasy.