How do the RRSP contribution carry forward rules work? + MORE Jun 9th

Can you write an article on how family RESPs work once the oldest children start to take money out of the plan while for the youngest we are still putting money into the plan?

What are the rules? Can you find one child with more money from the plan than another child? If one child does not go to post-secondary can their funds be used to fund one of the children in the plan?

—John

How a family RESP works

Good question, John. It’s surprising how few people know the withdrawal dynamics of an individual registered education savings plan (RESP), let alone how a family plan works.

Just to bring everyone up to speed, a family RESP is a tax-deferred education savings investment account with annual government grants that has multiple beneficiaries. A beneficiary can qualify for grants of 20% or more of a contribution, subject to both annual and lifetime limits, historical contributions, age, income, and province or territory of residence.

A family RESP is generally opened by parents or grandparents, though technically can be opened by a sibling, however unlikely…

Ask MoneySense
We live in Ontario, and in light of the current banking problems in the U.S., we are a bit concerned about our investments.

They are held at three different banks at the moment and are largely in GICs and high-interest savings accounts.

We are aware that up to $100,000 is insured through the CDIC (Canada Deposit Insurance Corporation) at each bank, but at the one bank where we have our TFSAs, we are over that amount.

What would you suggest we should do?

—Mrs. B

The risks of exceeding deposit limits at Canadian banks

Silicon Valley Bank (SVB) failed in March and was taken over by the U.S. Federal Deposit Insurance Corporation. SVB’s customers were primarily venture-backed tech startups, but the bank was hardly a small player. It was the 16th-largest bank at the time it failed, and its failure was the second largest in U.S. history.

The two primary issues with SVB were questionable risk management and high uninsured deposits. The bank did not manage its interest rate risk well, having a lot of short-term deposits invested in long-term bonds…

If I have $25,000 contribution room left in my RRSP, can I take that all at once plus my regular RRSP contribution of $30,780 for the tax year 2023? Effectively making a contribution of $55,780 to my RRSP?— Lorraine

The rules around RRSP contribution room 

As soon as a taxpayer starts to earn income—like employment income, self-employment income, royalties, research grants or net rental income—they accumulate room for their registered retirement savings plan (RRSP). There are no age limits, so a teenager with a part-time job can start to build their RRSP room as long as they file a tax return to report their earned income. 

How does RRSP carry forward work?

Your RRSP room carries forward, meaning the amount is cumulative. So, 18% of your earned income for the previous year, up to the current year’s maximum contribution limit, becomes your RRSP room for the year. For 2023, the maximum is $30,780 for taxpayers with at least $171,000 of earned income in 2022. This gets added to any previously unused RRSP room from the past…

Many retirees have the bulk of their retirement savings in registered retirement savings plans (RRSPs) or similar tax-deferred registered accounts. RRSPs need to be used to buy an annuity or more commonly converted to a registered retirement income fund (RRIF) by Dec. 31 of the year someone turns 71. Required RRIF withdrawals begin the next year, with each withdrawal based on a percentage of the account value. 

Locked-in RRSPs, defined contributions (DC) pensions, and deferred profit sharing plans (DPSPs) all have the same rule requiring conversion at age 71. 

The two big questions for a retiree prior to age 71 are: When should I start withdrawals? And how much should I take out each year?

If we take a simplistic approach to the RRSP drawdown, a sustainable withdrawal rate may be 2% to 5% of the account value. That is, between 2% and 5% of the starting account value may be withdrawn each year with subsequent withdrawals increased each year with inflation for life. There are many asterisks depending on age, life expectancy, investment risk tolerance, investment fees and other factors…

Investing

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