Weekly Tax Tips
Remember to Collapse Your RRSP if You Turn 71 This Year
Date: 10 Sep 2010
You can’t have an RRSP past December 31, 2010 if you’re 71 or older at year-end. So, prior to December 31, 2010, you must collapse your RRSP and pay tax on the fair market value of the plan’s assets at that time, purchase an annuity or transfer your RRSP assets to an RRIF. No tax is paid on the purchase of an annuity or the conversion to an RRIF.
If you will generate RRSP contribution room for 2011 because you have earned income in 2010, but you have to collapse your RRSP before the end of 2010, consider making an overcontribution to your RRSP in December, immediately before collapsing it. The amount of the overcontribution should equal $2,000 plus the 2011 contribution limit. A 1% penalty tax on the overcontribution in excess of $2,000 will apply for December 2010 — however, this will end on January 1, 2011 when the new contribution room becomes effective. The basic $2,000 overcontribution will become deductible when you generate additional RRSP room in the future and will never attract the 1% overcontribution penalty tax. If you won’t have earned income after 2010, then you may not want to make an overcontribution. Ask your BDO advisor if this type of planning makes sense for you.
If you must collapse your RRSP this year, you can still contribute to your spouse’s RRSP if you have contribution room and your spouse has not reached age 71 by December 31, 2010. This is an excellent way to build up your spouse’s RRSP.
If you want more information on RRSPs, read our Answering Your RRSP Questions bulletin.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 10 Sep 2010.
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