Canadians must convert their RRSP to a RRIF by the end of the year they turn 71. That means contributing to their RRSP by Dec. 31 or risking any unused contribution room going to waste.AnthonyRosenberg/iStockPhoto / Getty Images
Some clients who turned 71 this year and are still working might consider overcontributing to their RRSP before the end of this month.
While they’ll be hit with a penalty on the overcontribution, they’re likely to generate a larger tax benefit from being able to deduct the amount in 2026 or a future year.
“It’s certainly an opportunity for the right type of investor,” said Wilmot George, managing director of tax and estate planning at Canada Life in Toronto, during a Globe Advisor webinar earlier this week.
Canadians must convert their RRSP to a RRIF by the end of the year they turn 71. That means contributing to their RRSP by Dec. 31 or risking any unused contribution room going to waste.
There is an exception: clients over the age of 71 who have unused contribution room can still contribute to a spousal RRSP and claim the deduction, as long as their spouse or partner is 71 or younger in the year they make the contribution.
But what if someone turned 71 this year, doesn’t have a younger spouse or partner and has already maxed out their RRSP contribution room?
If they’re still working and earning income, they’ll have RRSP contribution room for the next year. So, while they can no longer contribute to their RRSP after this year, they can make an overcontribution this month.
Yes, they’ll be hit with a 1-per-cent per month penalty on overcontributions of more than $2,000 for December.
However, “come Jan. 1 of next year, that new room becomes available,” Mr. George said. “It absorbs the overcontribution and stops the penalty from accruing.”
Clients considering this strategy should weigh the expected cost of the penalty against the potential benefit of making the overcontribution and claiming the deduction in 2026 or subsequent years.
Mr. George touched on other year-end tax strategies, including tax-loss selling and donating appreciated securities. He also took a look at 2026 tax changes, including the tax-free savings account annual and overall contribution limit, and how Canadians can prepare for the upcoming tax season. You can watch our conversation here.
I also wrote a breakdown of year-end tax-saving tips for all the different registered plans, which you can read here.
– Rudy Mezzetta, Globe Advisor reporter
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