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How not to lose your RRSP money, in Ryan Gosling GIFs

Mon, Feb 20: A new study finds that more and more Canadians are chipping away at their RRSPs, but the experts say there are many reasons that’s a bad idea. Consumer reporter Anne Drewa has the details.

The Academy Awards are this weekend. And the deadline for contributing to your RRSPs is right around the corner, on March 1.

So Global News decided to use a Canadian celebrity nominated in La La Land, one of the year’s biggest films, to help you maximize your tax return.

Registered retirement savings plans (RRSPs) are a great way to reduce the amount of tax you pay on your income.

But things change the moment that you start taking money out of them.

The tax bill you face when you make an RRSP withdrawal can be quite the shock. But there are ways to reduce the sting — and, in some cases, your taxes owing.

READ MORE: No RRSP? No problem — not everyone needs one.

Here are eight tips to help keep most of your RRSP money, with Ryan Gosling GIFs.

1) You won’t get all your cash back when you withdraw from an RRSP

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When it comes time to withdraw your RRSP money, you’ll be taxed for it at whatever your marginal tax rate is, David Ablett, director of tax and estate planning at Investors Group, told Global News.

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Say you withdraw $5,000. Ten per cent in tax will be withheld from you. So you’re really only keeping $4,500.

But you made $50,000 in income in the year that you made that withdrawal. The $5,000 you withdrew would just be added to your income, though the taxes you already paid would be accounted for.

In Ontario alone, the full tax applied to that RRSP withdrawal would add up to 29.65 per cent — the province’s marginal tax rate for incomes at that level, Ablett said.

2) Check to see if your employer is contributing to your RRSP

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Your work may be putting money into your retirement through a Group RRSP.

It’s a nice perk if you can get it; but that money can also take up room under your contribution limit, noted Carol Bezaire, vice-president of tax and estate planning at Mackenzie Investments.

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Make sure you’re not putting so much money into your RRSP that you contribute beyond your limit (it’s 18 per cent of your income or $25,370 for the 2016 tax year, whichever is less), if your work already dropped a bunch of cash there.

If you do that, you could face a penalty of one per cent per month on any contribution over $2,000 – and that will add up until you take the excess amount out, Bezaire said.

3) You only have until you’re 71 to put money in an RRSP

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You can’t throw money into an RRSP forever — the tax man will catch up with you when you turn 71, Ablett said.

You’ll be paying tax on the money no matter what you do. But here are two ways you can convert your RRSP into something new:

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  • Put it in an annuity, in which the cash is paid back to you for the rest of your life;
  • Drop it in a Registered Retirement Income Fund (RRIF), which requires you to make minimum withdrawals every year

4) Hand your RRSP over to your husband or wife when you die

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Your spouse can put that money into their own RRSP and there are no immediate tax consequences, Ablett told Global News.

The tax deferral carries on as normal for the spouse until they turn 71.

5) Be careful about handing your RRSP to your kids when you die

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You might think you’re doing a good thing by leaving your RRSP to your kids in your will. But you’re also leaving them a massive tax bill, Ablett pointed out.

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RRSP administrators don’t withhold the tax owing on those plans when their owners die — but the money is nevertheless “taxable in the hands of the deceased for the year of death,” he said.

So say you leave a bunch of RRSP money to your kids, but there isn’t much other cash in your estate.

If the taxes on your RRSPs can’t be paid out of your estate, then that means your kids won’t be receiving all the RRSP money you left them. They’ll have to hand some (or lots) of that cash over to the tax authorities.

6) Name your estate as the beneficiary of your RRSP

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Your children won’t face the same kind of shock tax bill if you name your estate as the beneficiary of your RRSP, Ablett said.

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If you put your RRSP money into your estate, then it will have enough money to pay the tax on your retirement cash.

The government will tax your estate, and whatever’s left can go to your kids.

7) Leave your RRSP to a charity

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If you bequeath your RRSP money to a charity, then it’s considered a gift under the Income Tax Act.

“The effect of the donation tax credits will likely eliminate the tax liability associated with the inclusion of the RRSP assets,” Ablett said.

8) If you plan on withdrawing before you retire, do it in a low-income year

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If you must make an RRSP withdrawal before you retire, it’s best to do it when you’re not making much money, said Valorie Elgar, a tax expert at H&R Block.

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That way, you won’t have to pay as much tax on it.

Of course, if you withdraw the money early, it also means you lose “all the tax benefits of making an RRSP contribution,” Elgar said.