Year-end planning for your RRSP, RRIF, and TFSA

October 14, 2022by Akmin

Most Canadians know that the deadline for making contributions to one’s registered retirement savings plan (RRSP) comes 60 days after the end of the calendar year, around the end of February. There are, however, some circumstances in which an RRSP contribution must (or should) be made by December 31, in order to achieve the desired tax result.

Similarly, most Canadians who have opened a registered retirement income fund (RRIF) are aware that they are required to make a withdrawal of a specified amount from that RRIF each year, with the percentage withdrawal amount based on the RRIF holder’s age – although few are aware of when and how that required withdrawal is calculated.

The rules around tax-free savings accounts (TFSAs) are more flexible, but it is nonetheless the case that advantages can be obtained (and disadvantages avoided) by carefully timing TFSA withdrawals and recontributions based on the calendar year end.

In other words, while the basic rules with respect to contributions to and withdrawals from each of these savings plans are relatively straightforward, there are nonetheless benefits to be received from careful consideration of the detailed rules – and some exceptions from those rules.

What follows is an outline of steps which should be considered, before the end of the 2022 calendar year, by Canadians who have an RRSP, an RRIF, and/or a TFSA – or maybe all three.

Timing of RRSP contributions

When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to a registered retirement savings plan (RRSP) in his or her spouse’s name and claim the deduction for the contribution on his or her own return. When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate. However, the benefit of having withdrawals taxed in the hands of the spouse is available only where the withdrawal takes place no sooner than the end of the second calendar year following the year in which the contribution is made. Therefore, where a contribution to a spousal RRSP is made in December of 2022, the contributor can claim a deduction for that contribution on his or her return for 2022. The spouse can then withdraw that amount as early as January 1, 2025 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2023, the contributor can still claim a deduction for it on the 2022 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2026. This is an especially important consideration for couples who are approaching retirement who may plan on withdrawing funds in the relatively near future. Even where that’s not the situation, making the contribution before the end of the calendar year will ensure maximum flexibility should an unforeseen need to withdraw funds arise.

When you are turning 71 during 2022

Every Canadian who has an RRSP must collapse that plan by the end of the year in which he or she turns 71 years of age – usually by converting the RRSP into an RRIF or by purchasing an annuity. An individual who turns 71 during the year is still entitled to make a final RRSP contribution for that year, assuming that he or she has sufficient contribution room. However, in such cases, the 60-day window for contributions after December 31 is not available. Any RRSP contribution to be made by a person who turns 71 during the year must be made by December 31 of that year. Once that deadline has passed, no further RRSP contributions are possible.

RRIF withdrawals for 2022

Under Canadian law, anyone who has a registered retirement income fund (RRIF) is required to make a minimum withdrawal from that RRIF each year. The amount of the withdrawal is calculated as a specified percentage of the balance in the RRIF at the beginning of the calendar year, with that percentage based on the age of the RRIF holder at that time.

During the second quarter of 2022, the Toronto Stock Exchange experienced a significant loss in value – down by 13.9%. Since required RRIF withdrawal amounts are based on the value of the RRIF at the start of the calendar year, many RRIF holders will, unfortunately, be faced with the prospect of having to make withdrawals from a portfolio whose value has declined since the beginning of 2022. While there is no way of avoiding the requirement to withdraw that minimum amount from one’s RRIF, and to pay tax on the amount withdrawn, taxpayers who do not have immediate need of such funds can consider contributing those amounts to a TFSA. Where that is done, the funds can be invested and continue to grow, and neither the original contribution nor the investment gains will be taxable when the funds are withdrawn from the TFSA.

Planning for TFSA withdrawals and contributions

Each Canadian aged 18 and over can make an annual contribution to a tax-free savings account (TFSA) – the maximum contribution for 2022 is $6,000. As well, where an amount previously contributed to a TFSA is withdrawn from the plan, that withdrawn amount can be re-contributed, but not until the year following the year of withdrawal.

Consequently, it makes sense, where a TFSA withdrawal is planned (or the need to make such a withdrawal might arise) within the next few months, to make that withdrawal before the end of the calendar year. A taxpayer who withdraws funds from his or her TFSA on or before December 31, 2022 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2023, which means it can be re-contributed, where finances allow, as early as January 1, 2023. If the same taxpayer waits until January of 2023 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2024.

The approach of the calendar year end doesn’t usually prompt Canadians to consider the details of making contributions to an RRSP or withdrawals from a TFSA or a RRIF. There is, however, no flexibility in the deadlines for taking such actions, and considering what steps may be needed or advisable now means one less thing to remember as the December 31 deadline nears.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.