February 25, 2008 10:57 ET

Are You Making the Most of Your RRSP?

Tax Tips for RRSP Season

TORONTO, ONTARIO--(Marketwire - Feb. 25, 2008) - Your RRSP can do much more than help you plan for your retirement-your RRSP can produce tax benefits that can be advantageous to you long before you retire. With the February 29, 2008, deadline for 2007 tax-deductible contributions coming up soon, KPMG offers options you may want to consider to help you get the most benefits from your RRSP.

"Taxpayers can reap greater benefits by properly timing when and how they use their RRSPs," advises Paul Woolford, Partner in KPMG's Enterprise services. "With the recent increases to contribution limits and additional options, such as the Lifelong Learning Plan for financing education, the government has made it easier for Canadians to enhance the use of this retirement vehicle. However, people who are well informed about the ins and outs of RRSPs and taxes can benefit even more."

The following ideas will help remind you of some of your options for getting the most out of your RRSP.

- Consider the preferred tax treatment for dividends and capital gains on investments held outside your RRSP when determining which types of assets to hold inside your RRSP.

- Consider a spousal RRSP for retirement income splitting if you expect your spouse's retirement income to be lower than yours. Keep in mind that your retirement income from your matured RRSP may qualify for new spousal income splitting rules.

- A spousal RRSP may also provide an opportunity for a longer period of tax-free growth for your contributions if your spouse is younger than you are.

- Make your maximum allowable contribution for 2007 to enhance your tax benefits. You can contribute 18 percent of your "earned income" in 2006, or $19,000, whichever is less (if you're a pension plan member, your maximum contribution may be reduced).

- Contribute early for 2008; rather than waiting until the March 1, 2009, deadline, consider making your 2008 contribution now, or as early as you can, to begin accumulating tax-free income on the contribution as soon as possible. For 2008, you can contribute 18 percent of your earned income in 2007, or $20,000, whichever is less (again, if you're a pension plan member, your maximum contribution may be reduced).

- If you are turning 71 in 2008, consider options for maturing your RRSP, and remember to make your final contribution by December 31, 2008.

- Consider Home Buyers' Plan withdrawals to buy your first home, or Lifelong Learning Plan withdrawals to advance your training or post-secondary education, but be sure to weigh the loss of RRSP growth.

Time Your Deductions to Increase Tax Benefits

The tax benefits you'll gain on your 2007 return by making your 2007 RRSP contribution by February 29, 2008, will depend on your marginal tax rate. Generally, if your income is taxed at the top rate (i.e., about 46 percent, depending on your province), your RRSP deduction will create current tax benefits of about 46 percent of the amount you contribute.

If your income falls into one of the lower three brackets in 2007, the deduction will be worth proportionally less: about 42 percent of the amount you contribute if you are in the third bracket, about 35 percent if you are in the second bracket, and about 24 percent if you are in the lowest bracket. In light of the different marginal tax rates, keep in mind the following ways in which you can benefit:

- In a low-income year, consider making your maximum possible RRSP contribution, but deferring claiming the deduction until a later year when your income is taxed at a higher marginal rate. This approach can help increase the tax-free growth of funds while also enhancing your benefits.

- Similarly, if you're making a large RRSP catch-up contribution, consider only claiming enough of the resulting deduction to reduce your taxable income in the top tax brackets. You can carry forward the remaining deduction for greater tax benefits in a future year against income that is taxed in the higher tax brackets.

Of course, these ideas are not an exhaustive list of your RRSP tax planning options. You can find more information on RRSPs and other tax and financial planning matters in KPMG's Tax Planning for You and Your Family 2008, now available in bookstores across Canada or directly from the publisher, Thomson Carswell (telephone: 1-800-387-5351).

"Planning is essential to making the most of your finances and this book is designed to help taxpayers manage their tax situation more effectively," Woolford says.

About KPMG in Canada

KPMG LLP, a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm affiliated with KPMG International, a global network of professional firms providing Audit, Tax, and Advisory services. Member firms operate in 145 countries and have more than 123,000 professionals working around the world.

The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.

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