Chris, let's get started. Number five, where you put those US dividend stocks.
- Well, if you happen to own a US dividend-paying stock in your non-registered portfolio, although you'll pay US withholding tax on that dividend, that tax generates a foreign tax credit in Canada and you're in a tax neutral position. So it doesn't really matter to you.
In your registered account, where you hold a US dividend-paying stock does matter. In a TFSA, it's going to generate a US tax but no offsetting Canadian tax credit. In an RRSP, however, the US respects the tax deferred nature of that account and you will not pay any US withholding tax. So what I'm saying is, in your registered accounts it's better to hold that dividend paying stock inside your RRSP than a TFSA.
- Number four, where to make short-term withdrawals from.
- Right. So if you have a short term spending need, withdrawing money from an RRSP is not the best choice. And really there's two reasons for that. First, you have to understand that the withdrawal will be taxed as income. You'll pay withholding tax upfront and then true up that tax on your income tax return. Next, RRSP withdrawals do not refresh your contribution room. So it means that you have no ability to re-contribute to the RRSP.
So your better bet there is to find an alternative means of funding that need, and maybe a TFSA is a better option. And the reason for that is that TFSA withdrawals are completely tax-free and TFSA withdrawals do refresh your contribution room. The only thing to watch out there is that you have to wait until the next calendar year to make that contribution.
And we all make those mistakes. In fact, my very own mother made that mistake last year when she made a withdrawal and ended up recontributing to her TFSA later in the year, but that put her in an over-contribution position.
- Number three, timing your contributions and deductions.
- Right. So when you make a contribution to your RRSP, you're entitled to, but not obligated, to take that deduction on your tax return. And when you realize that a deduction really is equivalent in value to your tax rate, the math becomes pretty clear.
So let's say your tax rate is 20%. $1 in deduction saves you $0.20 in tax. But if you expect your tax rate to go up in the near future, let's say to 40%, well then that same dollar in deduction is going to save $0.40 in tax. So the tip here is that if you've made an RRSP contribution but you expect your tax rate next year, perhaps, to jump up quite a bit, then maybe it's worthwhile hanging on and claiming that deduction in a future tax year.
- Number two, when a spousal RRSP might work better than pension income splitting.
- Using a spouse RRSP really is an income splitting technique. If you find that your spouse is going to be a low income earner in retirement, then you may consider a spousal RRSP. And we don't see these as often because of income splitting rules, but there still are some benefits to spousal RRSPs.
First, income splitting legislatively typically starts at age 65, while you don't have that age restriction if you use a spousal RRSP. And income splitting is also restricted typically to 50% of the eligible pension income. Well, with a spousal RRSP, if you wanted to, you could take every single dollar that you're eligible to and put it towards a spousal RRSP. So still some benefits to consider for a spousal RRSP.
- And your number one tip, review your RRSP estate plans and beneficiaries.
- So when you're thinking about RRSPs, also give consideration to your RRSP beneficiary designations. And that's, in fact, important for tax planning reasons because it can limit your date of death tax, it can limit exposure to probate fees at death, and it can also limit your exposure to your state's creditors. But I would also say that once you have made those designations, do revisit them any time a major life event occurs, such as a marriage, a divorce, or the birth of a child.
- Thanks, Chris. And the RRSP contribution deadline is March 1st this year. And if you found some extra savings, it might be a good time to get them to work for you.