Found 7 posts tagged as "RRSP"
It seems the old Registered Retirement Savings Plan (RRSP) has taken a beating in the media lately, with pundits giving props to the fresh-faced Tax-Free Savings Account (TFSA) for retirement planning. But don't be swayed by this banter -- your RRSP can still be your best bet for saving taxes today while growing a healthy sum for tomorrow's retirement.
With the 2010 RRSP deadline rapidly approaching, here are five things that still make the old RRSP a winner:
1. A sizable tax break.
Depending on your marginal tax rate, your RRSP contribution could give you a sizable tax break. For example, Ontario residents in the highest tax bracket who earn over $127,000 would get a tax refund of around $460 for every $1,000 contributed. Those in the lowest tax bracket (earning up to $40,970) still bring home a tidy $200 refund for every $1000 stashed in an RRSP.
Bottom Line: Whether you're saving $0.46 or $0.20 on the dollar, your tax refund represents a savings that can be used to pay off consumer debt, saved in a TFSA, or used towards an extra mortgage payment.
See RRSP Investment Options for different ways to stash your RRSP contribution cash.
2. Tax-Deferred growth.
Looking for a tidy tax shelter? Both your RRSP contributions and investment earnings can accumulate and compound tax-free for decades if you don't touch the cash. Since the Tax Man won't be tapping your funds every year, your retirement savings can grow faster.
Bottom Line: The Tax Man will get his day when you retire since RRSPs are taxed when the money is withdrawn. This tax deferral can be an advantage if your income in retirement is lower than in your peak earning years.
3. Carry forward your unused contribution room.
Can't 'max out' your RRSP this year? No worries. Your unused contribution room is yours to keep and can be carried forward to future years. Stashing even a little cash in your RRSP every year is a good idea, but it's not like you'll loose the unused portion if you can't maximize it this year.
Bottom Line: Be sure to contribute up to 18% of your income to a maximum of $22,000 (plus any unused contribution room) before the March 1st deadline to get your tax refund. See your 'Notice of Assessment' statement from the Canada Revenue Agency for your RRSP limits.
4. Some employers match RRSP contributions.
Head to your Human Resources department today to see if your employer matches RRSP contributions under your benefit plan. Employer RRSP matches can range anywhere from 5% to 150%, giving you an immediate and guaranteed return on your investment. You may need to join a Group RRSP Plan to get the free cash, and your share of the RRSP contribution will be deducted from your paycheque.
Bottom Line: You won't miss the money as much when your RRSP contributions are deducted equally across pay periods, plus you'll benefit from an instant tax break because you're reducing taxes at the source.
5. Buy a home, or go back to school.
If your RRSP is flush full of funds and you're in the market to buy some real estate, use the Home Buyers' Plan (HBP) to borrow up to $25,000 tax-free from your RRSP. For those looking to head back to class, the Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 per year (up to $20,000 over the period you are participating in the LLP) to finance training or education for you or your spouse.
Bottom Line: Be aware that you'll miss out on the tax-deferred growth in your RRSP and you must repay all borrowed RRSP cash under the HBP and LLP or get taxed big time.
For more details and some downsides of each program, see Should you use your RRSP to buy a home? and LLP Impact on RRSP deductions.
Your Turn: How are you saving for your retirement?
Kerry K. Taylor writes at Squawkfox.com, a blog where frugal living is fun. Kerry is the author of 397 Ways To Save Money: Spend Smarter & Live Well on Less.
In a perfect world you would max out both your Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). But guess what? The world lacks perfection. If you're wondering where to contribute your cash this year, consider the differences, pitfalls, and advantages of each.
RRSPs: The good, the bad, the ugly?
Good: Defer tax during your highest earning years and pay the tax man years later when you're retired, and hopefully in a lower tax bracket. Investment earnings accumulate on a tax-sheltered basis. See 3 Places Worthy of Your RRSP Account for the details.
Good: Get a tax refund by contributing up to 18% of your income before the March 1st deadline. Use the refund to pay down consumer debt, make a mortgage payment, or contribute to your TFSA.
Good: Can't contribute this year? Carry forward the unused portion to future years. See your 'Notice of Assessment' statement from the Canada Revenue Agency for your amounts.
Good: Use the Home Buyers' Plan (HBP) to borrow up to $25,000 tax-free from your RRSP to buy or build a home. See Should you use your RRSP to buy a home? for the details.
Bad: RRSP withdrawals are taxed in the year the money is taken out, and you cannot recontribute that cash once it is withdrawn. Exceptions are the Home Buyers' Plan and the Lifelong Learning Plan, as long as the money is repaid on schedule.
Bad: Your RRSP must be converted into a Registered Retirement Income Fund (RRIF) by December 31st in the year you turn 71, and you must withdraw a minimum amount of retirement income from your RIFF each year. By age 71 your annual mandatory minimum payments are more than 7% and increase each year. If your savings are modest, you could run out of RIFF funds.
Ugly: RRSP or RIFF withdrawals can increase your income substantially, making you ineligible for means-tested benefits such as the Guaranteed Income Supplement (GIS). If your net individual income is greater than $66,733 in 2010 ($67,668 for 2011) your Old Age Security (OAS) pension will be clawed back. See OAS Repayment Rules for the details.
TFSAs: The good, the bad, the ugly?
Good: Canadian residents can save up to $5,000 per year in a TFSA and watch their savings grow tax-free. Unlike the RRSP, you don't need to earn an income to contribute, but you must be at least 18 years old to open an account.
Good: Like the RRSP, you can carry forward unused contribution room from previous years, making the total maximum TFSA limit $15,000 per person in 2011.
Good: Unlike an RRSP, withdrawals from a TFSA are tax-free. Any money withdrawn is added to your contribution room in the next calendar year, making is possible to recontribute that cash.
Good: Unlike an RRSP, you are not required to convert your TFSA to a RIFF-like income plan or withdraw a mandatory amount. TFSAs are far more flexible than RRSPs.
Good: Unlike the RRSP, your TFSA withdrawals won't affect your eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security (OAS), or the Guaranteed Income Supplement (GIS) benefit. This makes the TFSA an excellent choice for seniors who could face an OAS clawback due to mandatory RRSP withdrawals.
Bad: Unlike your RRSP, contributions to a TFSA are not tax-deductible on your income tax return, and you won't get a refund.
Ugly: Around 70,000 Canadians over-contributed to their TFSAs in 2010 by misinterpreting the TFSA rules. Contribute or replace too much cash in a given calendar year and you'll pay a 1% per month penalty on the overage. See 6 Things to know about your TFSA for the rules, and other gotchas.
Your Turn: Are you contributing to your TFSA, RRSP, or both this year?
Kerry K. Taylor writes at Squawkfox.com, a blog where frugal living is fun. Kerry is the author of 397 Ways To Save Money: Spend Smarter & Live Well on Less.
Figuring out how to invest your hard-earned money can be a challenge. With fund companies, banks, and financial advisors all looking to invest your retirement dollars, the choices can be overwhelming and it's not hard to be sold an investment that's loaded with fees and light on returns. Since keeping more money for yourself is always a good retirement strategy, here are three types of investments you should avoid at all costs.
1. High Fee Mutual Funds
Investing in a high-fee mutual fund will cost you. Mutual fund fees called management expense ratios (MERs), loads, and trailer fees all drastically decrease the return you see each year.
Not only do you lose the money for paying these fees, but over time you also lose out on the compound interest you would have earned. With many Canadian mutual funds charging investors a 2.5% MER and higher, it's shocking to see how paying even 1% less can save you thousands and help you retire sooner. For example, let's look at the costs of a MER:
- $100,000 is invested over 25 years with markets returning 6% per year. With no fees, this would be $429,187.
- With a 2.5% MER you pay $101,182 in fees, keeping just $227,909 at the end.
- Reducing these costs by 1% you end up with $294,139 -- that's $66,230 more.
Checking a fund's prospectus for costs and asking your advisor for low cost mutual funds can save you tens of thousands of dollars.
2. Principal-Protected Notes (PPNs)
If your financial advisor is trying to sell you a PPN, then you'd be wise to seek new help. PPNs are often sold to risk-averse investors since they guarantee the invested principal while offering returns on underlying investment products, such as mutual funds, hedge funds, and baskets of equities including stocks. Here are just a few perils of PPNs:
PPNs are expensive. Many have an up-front sales commission of 5% plus a MER of around 2%, which includes a hefty trailer fee to the person who sold you the PPN. MERs depend on the issuer but this fee is standard and erodes your investment over time.
PPNs lock you in for years. PPNs typically mature in 3 to 7 years or longer, and a lot can happen to your financial situation during that time. If you need to sell, be prepared to lose the guarantee on your principal and pay stiff penalties for selling early.
Lack of clarity about returns. Even after the Government of Canada's attempt to improve transparency of PPNs, the media's warning cry is still loud and clear. In his book, What’s Good, Bad and Downright Awful in Canadian Investments Today, financial author Rob Carrick says that PPNs still lack clarity since issuers often skip over your market exposure, making it difficult to know how much the underlying investments have to make in order for you to beat the returns of a GIC or bond. "PPN issuers don't answer these questions," says Carrick.
Financial author Gordon Pape is not of fan of PPNs either. In Be wary of PPNs, Pape calls them "an opportunistic marketing gimmick designed to play on your anxieties. Avoid them."
3. Guaranteed Investment Certificates (GICs)
So you think GICs are risk-free? Think again. A guarantee on your investment plus a fixed rate of return comes with a serious downside -- inflation. With the current inflation rate at 1.9% and the big banks offering around 2.0% on a 5 year GIC, it's impossible to retain your buying power over time.
To avoid the results of a GIC Horror Show, Duncan Hood says the "safest place to put your money isn't in any single place, but in the broadest, most diversified portfolio you can construct."
Your Turn: Ever get sold a confusing investment? Do you know how much you're paying in mutual fund fees each year?
With the RRSP contribution deadline looming, the advertising blitz is on to get your attention and retirement dollars. If you're a newer investor, you may be looking for that perfect place to open your RRSP account. There are several choices to consider.
Choosing where to open an RRSP account is different from deciding what to invest in. Since an RRSP is just a container to hold eligible investments, the key is to open your RRSP account at a financial institution that meets your needs.
You don't need to stick to just one RRSP account either -- you can open several RRSP accounts at a variety of financial institutions as long as you don't exceed your total contribution limit. Then, at each institution, you can choose among the firm's various investment options for your RRSP account.
- Mutual fund fees can eat into your retirement savings, see how with the Portfolio Fee Calculator -- results will shock you!
For now, let's look at the advantages and disadvantages to opening your RRSP account at a variety of financial institutions.
1. Your Bank or Credit Union
Opening an RRSP can be as easy as walking into your regular bank or credit union and filling out the paperwork.
- Pros: Your RRSP account is located at the same institution where you bank, providing a familiar place for you to get started. Plus, they often have ready-made portfolios making it simple for new investors. The "Big Banks" can offer many investment types, including GICs, mutual funds, and index funds.
- Cons: Investments are often limited to the institution's offerings, and account fees and mutual fund fees may be high.
You may also consider opening your RRSP account with an online bank where account and fund fees may be less expensive.
2. Your Employer or Group RRSP
If your employer offers a group RRSP plan and matches contributions, then you could be in for some free money.
- Pros: Contributing to your RRSP every pay period helps you consistently build your retirement savings, and getting your employer to match contributions could help you retire sooner. Your company sponsored plan may offer low-fee and no-load mutual funds -- be sure to ask!
- Cons: Many group plans are limited to the predetermined investment options your employer offers. There may also be plan fees and rules for when and how you can withdraw funds from your account.
Joining a group plan is easy; just contact your Human Resources department and fill out the paperwork. Your contributions are then taken from your pre-tax pay as payroll deductions, reducing your income tax immediately. Your contributions are deposited into your RRSP as specified.
3. An Online Broker
If you're a do-it-yourself investor, then opening an RRSP account with an online broker may be for you.
- Pros: Online brokers give you a centralized place to invest in mutual funds, exchange-traded funds (ETFs), stocks, bonds, and a myriad of other investments from a variety of fund companies.
- Cons: It may be overwhelming for new investors to build their own portfolio, but there are many investor sites online (for example, MoneySense) if you're willing to learn. Be sure to look at account fees, MERs, loads, and transaction costs before signing up with an online broker.
The Globe and Mail does an annual review of online brokers and gives you the top tips for opening an account that's right for you.
More on RRSPs:
Your Turn: Do you have more than one RRSP account? Got any tips to share?
Saving for retirement can be tough. Depending on your income and financial obligations, it's not hard to feel the pinch in your pocketbook right before the RRSP deadline.
Wouldn't it be nice if you could grow your RRSP without contributing extra cash? Well, it is possible! With a little bit of planning and these three smart strategies you can bulk up your RRSP savings and grow your retirement without any additional dollars.
If you're new to RRSPs, then check out The 5 Minute Guide To Your RRSP.
1. Contribute at the beginning of the tax year
If you're contributing to your RRSP at the end of the tax year, then you're missing out on a full year of compound growth. Over time this tax-free growth can add up to thousands of extra dollars.
For example, let's assume you're putting $5,000 into your RRSP annually. At a conservative rate of 3%, here's how the money adds up after 25 years:
Total RRSP by contributing at start of tax year: $187,765.21
Total RRSP by contributing at end of tax year: $182,296.32
Difference: $5,468.89
By switching your contributions to January 1st, the start of the tax year, you're giving your RRSP additional time to grow for free by harnessing the power of compound interest.
2. Don't give the government an interest-free loan
I used to rejoice every year when my RRSP contribution earned me a nice little tax refund. In hindsight, getting an annual tax refund is akin to giving the government an interest-free loan. Who wants to do that?
If you make regular RRSP contributions you can request to have fewer tax dollars deducted from your paycheque by filing a Request to Reduce Tax Deductions at Source (T1213). The form is easy to fill out -- the instructions are explained in Stop giving the government an interest free loan!
Besides, paying less tax throughout the year makes it easier to boost your RRSP contributions, fund your Tax-Free Savings Account, or even pay down your mortgage.
3. Defer Your RRSP Deduction
If you're expecting a big raise next year, consider deferring your RRSP deduction for next year. By contributing to your RRSP today and saving your tax deduction for when your income is greater, you could save big on taxes tomorrow by lowering your tax bracket.
For example, a $2,500 RRSP contribution made at a marginal tax rate of 23% earns you a $575 tax refund. But by deferring this deduction to next year, when you know you're income is at a higher marginal tax rate of 37%, you could earn a $925 refund.
By deferring your deduction one year at a higher marginal tax rate, you end up with an extra $350 for the same $2,500 RRSP contribution -- this is essentially a guaranteed 14% rate of return. Now add these newly found additional dollars to your RRSP and continue to watch it grow!
Your Turn: Do you use any of these strategies to grow your RRSP without contributing extra money?
Getting started with an RRSP can be a smart way to lower your taxable income today while saving for your retirement tomorrow. If you're new to RRSPs then this 5 Minute Guide is for you.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a tax-deferred personal investment account that is registered with the federal government. The primary purpose of your RRSP is to help you save for retirement.
Why contribute to an RRSP?
If you're just starting your career then retirement may seem eons away. But there are many advantages to starting your RRSP sooner, even today!
- Tax Benefits Today: Contributing to your RRSP yearly can greatly reduce the amount of income tax you pay in that year. By contributing throughout your working career, you can realize tax benefits at a time while your income is generally highest.
- Tax-Deferred Growth Tomorrow: Your RRSP can benefit from compound growth for decades since your contributions are sheltered from tax. You won't pay any tax on your RRSP until it's withdrawn.
- Taxed at Retirement: Paying income tax on your RRSP withdrawals upon retirement may be an advantage since you may well be in a lower tax bracket than when you were working.
- Maintaining Your Lifestyle: Starting an RRSP sooner may also help you maintain your lifestyle in retirement regardless of how much you qualify for under the Canada Pension Plan (CPP).
- Get Your Employer Match: If you're lucky, your employer may offer RRSP matches up to a percentage or dollar amount. It's wise not to leave this free money on the table, so head to your human resources department and ask if such a program exists at your company.
Who can contribute to an RRSP?
All individuals with earned income taxable in Canada can contribute to an RRSP up until the end of their 71st year.
How much can you contribute?
The amount you can contribute each year is limited to 18% of your previous year's earned income and up to the maximum dollar amount for the year. The RRSP contribution limit for 2009 is $21,000 and will be $22,000 in 2010.
If you contribute less than your limit, you can carry forward any unused contribution room to any future year. There is no expiration date on unused RRSP contribution room. You can find your RRSP contribution limit and any unused room on your Notice of Assessment, a letter the Canada Revenue Agency (CRA) sends you yearly after filing your tax return.
How do you open an RRSP?
You can open an RRSP account at any bank, credit union, discount brokerage, or mutual fund company. Your employer may offer an RRSP program as well.
When opening an account, be prepared to answer a series of questions to help your financial advisor understand your risk tolerance and retirement time line. Returns can vary widely depending on market conditions, risk, investment type, investment fees, and time line -- so it's important to answer each question carefully. Also, be sure to ask about the fees associated with each investment.
Your banker or financial advisor will use your answers to find the investment portfolio that's right for you. Your RRSP investments can include GICs, stocks, bonds, index funds, exchange traded funds (ETFs), savings deposits, T-Bills, mutual funds, and others.
RRSP Deadline
The RRSP contribution deadline for the 2009 tax year is March 1st, 2010.
Now that you've read the guide, go ahead and test your RRSP knowledge with the RRSP Quiz.
More Quick 5 Minute Financial Guides:
Your Turn: Are you contributing to your RRSP this year? How are you saving for retirement?
If you're looking to purchase or build a home in the New Year, your Registered Retirement Savings Plan (RRSP) may hold the key to affording that dream roof over your head.
Under the Home Buyers' Plan (HBP), would-be home buyers can borrow up to $25,000 tax free from their RRSPs to buy or build a home. If you are purchasing the home with a spouse, you can both withdraw up to $25,000 from each of your RRSP accounts.
Want to see if making a bigger down payment using the HBP buys you a home sooner?
How to qualify for the HBP
You are eligible for the HBP if you and your spouse are both first time home buyers, or have not owned your principal residence at any time during the year of your RRSP withdrawal and the four preceding years. If you've already purchased a home, then you have up to one month after the sale to still apply to the plan. Lastly, you must be a Canadian resident to qualify.
RRSP repayment rules
You need to start repaying the money to your RRSP the second year following the year in which you made your withdrawals. You have up to 15 years to repay the full amount where each year 1/15th of the total amount is due. The Canada Revenue Agency (CRA) will send you statements outlining your payment schedule.
HBP Advantages
The HBP gives you a tax free and interest free way to access the money in your RRSP, allowing you to buy a home sooner. If you can use your RRSP under the HBP plan to make a 20% down payment, then you may qualify for a lower interest rate on your mortgage and may avoid paying Mortgage Loan Insurance -- which could save you thousands of dollars!
HBP Disadvantages
While the HBP gives you a way to get into the real estate market sooner, you should be aware of the possible downsides of missing a repayment and touching your RRSP savings before retirement.
- Missing Repayments: If you don't make a full payment in a year, the unpaid amount is fully taxed as income in your hands.
- Loss of Tax Free Growth: Borrowing money from your RRSP means you're losing out on up to 15 years of tax free growth, which may not be made up by the increase in home equity over time.
- Contribution Rules: You cannot make an RRSP contribution and then immediately withdraw that contribution under the HBP -- you must wait at least 90 days.
- Declaring Bankruptcy: If you declare bankruptcy, you still need to make the payments back to your RRSP, or the money will be taxed as income in the years where you don't make a payment.
Check out the Home Buyers' Plan details at the Canada Revenue Agency for forms and more information.
Your Turn: Have you used the Home Buyers' Plan to help you purchase a home? Got any tips to share?
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