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

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 be (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 of 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 to those rules.

What follows is an outline of steps which should be considered, before the end of the 2021 calendar year, by Canadians who have an RRSP, a RRIF, and/or a TFSA.

Timing of RRSP contributions

When you are making a spousal RRSP contribution

Under Canadian tax rules, a taxpayer can make a contribution to an 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 When the funds are withdrawn by the spouse, the amounts are taxed as the spouse’s income, at a (presumably) lower tax rate.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 2021, the contributor can claim a deduction for that contribution on his or her return for 2021. The spouse can then withdraw that amount as early as January 1, 2024 and have it taxed in his or her own hands. If the contribution isn’t made until January or February of 2022, the contributor can still claim a deduction for it on the 2021 tax return, but the amount won’t be eligible to be taxed in the spouse’s hands on withdrawal until January 1, 2025. It’s 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 2021

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 a 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 2021

Under Canadian law, anyone who has a 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.

Those RRIF holders who elect to withdraw only the required minimum amount each year will likely notice a significant increase in the amount which must be withdrawn (and taxed) in 2021 when compared to the required withdrawal from 2020. That difference is attributable, for the most part, not to increases in the value of the RRIF or the increased age of the RRIF holder, but to a temporary rule which was put in place in 2020 as part of the pandemic relief measures.

In March 2021, the stock market experienced a significant loss in value. Since required RRIF withdrawal amounts are based on the value of the RRIF at the start of the calendar year, many RRIF holders were faced with the prospect of having to make withdrawals from a portfolio whose value had declined precipitously since January 1, 2020. In recognition of that reality, required RRIF withdrawals for RRIF holders of all ages were reduced (for 2020 only) by 25%.

For 2021, the usual RRIF percentage withdrawal requirements have been reinstated. That fact, combined with the market recovery since March 2020, will mean that many RRIF holders may be surprised at the amount which they must withdraw from their RRIFs (and pay tax on) in 2021.

Take, for example, an individual who was 74 years old at the beginning of 2020 and had $500,000 in his or her RRIF on January 1, 2020. The required minimum withdrawal for 2020 (taking into account the 25% reduction) would have been $21,250.

Assume that the balance in the RRIF grew by 5% during 2020 and that the RRIF balance was therefore $525,000 on January 1, 2021. The RRIF holder (aged 75 as of January 1, 2021) will be required to withdraw a minimum of $30,555 from that RRIF for 2021, and to pay tax on that amount.

While there is no way of avoiding the requirement to withdraw a 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 TFSA — the maximum contribution for 2021 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 before December 31, 2021 will have the amount which is withdrawn added to his or her TFSA contribution limit for 2022, which means it can be re-contributed, where finances allow, as early as January 1, 2022. If the same taxpayer waits until January of 2022 to make the withdrawal, he or she won’t be eligible to replace the funds withdrawn until 2023.

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.