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Other Amounts May be Added to the RSP
Certain amounts may be added to an RSP without affecting your regular contributions.
Retiring Allowances
A retiring allowance may be due at retirement to recognize long service, or it might be a severance payment for a loss of office or employment. Payments for service through 1995, even if they are made after 1995, qualify for transfer to your RSP, subject to the limits shown below. This entitlement is based on service with the employer you are leaving plus any related organizations. This transfer can be extremely beneficial for an entrepreneur who is selling or retiring from an incorporated company he or she created many years ago.
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Retiring Allowance Rollover
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$2,000 per year of service prior to 1996 with the company paying the retiring allowance
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PLUS
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an additional $1,500 per year of service prior to 1989 with the same company for which you did not accrue benefits under the company’s pension plan.
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Lump Sums Received from a Registered Pension Plan
If you leave an employer’s registered pension plan before retirement age, you can transfer the present value of your benefits to a locked-in RSP or locked-in retirement account (LIRA). These plans work just like regular RSPs except that withdrawals are generally prohibited. Some provinces do allow early access in cases of financial hardship or health problems. At a certain point – usually the earliest retirement age for the pension plan you left – you can start regular withdrawals by converting the plan to a life income fund (LIF) or, if your province allows, to a locked-in retirement income fund (LRIF). LIFs and LRIFs are similar to a retirement income fund (RIF), but have maximum as well as minimum annual withdrawal limits. A LIF that holds pension money under federal jurisdiction must be converted to a life annuity when you are 80 years old. LIFs under provincial jurisdiction no longer face this requirement, or can be converted at age 80 to an LRIF, which does not require annuitization. Ask your Investment Advisor for complete details.
The Cumulative $2,000 Excess Contribution
The PA calculations – done by your employer – are so complex that federal officials created a penalty-free RSP overcontribution zone to allow for errors. It’s available to everyone aged 19 or older. You are allowed to put as much as $2,000 extra into your RSP without penalty. That’s a cumulative lifetime limit, not an annual amount.
This overcontribution is not tax-deductible when it goes into the plan, but is fully taxed when it’s withdrawn. So, be careful in how you use it. Here are two ways:
- Make the overcontribution and forget about it. Just manage it as you would a normal contribution. That can pay off if the money stays in the RSP long enough for tax-free compounding to more than cover the tax due on withdrawal. For example, assuming 6% average annual growth, breakeven would take about 24 years if your marginal tax rate were 50% at both time of contribution and withdrawal.
- Treat the overcontribution as an advance contribution. Put in the money now and wait for a distant year when you have RSP contribution room but are short of cash. For instance, people in their first year as retirees often find that their lifestyle expenses have not yet dropped as much as their income. You could then have the tax department count your overcontribution against the normal limit you are unlikely to use, and get a tax deduction for it.
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