Monday, November 2nd, 2009
Now that you’re in your 50s you’ve probably asked yourself this question a number of times:
How much do I need to retire?
The answer to that question depends very much on the lifestyle you envision in retirement.
Perhaps you want to travel the world or trade your expensive house in the city for a smaller one in the country, and just enjoy yourself. But no matter what your goals are in retirement, financial planning at this stage forces you to admit that your retirement is almost here and you have to make some critical decisions. (more…)
Tags: Investments, Mutual Funds, Retirement Planning, RRSP
Posted in Investments, Mutual Funds, RRSP, Retirement Planning | No Comments »
Tuesday, October 20th, 2009
As we get closer to the end of October, the spectre of the RRSP contribution looms ever closer. If you’re like most people, the end of the year means scraping together for gifts – and RRSP contributions. My clients are familiar with my philosophy on RRSP contributions: Make them early and make them often. But I don’t just flog RRSPs because they promote retirement savings and give you a shot at a nice tax refund. I promote RRSPs because they can help increase your take-home pay.
If you aren’t up to date on your contributions, don’t feel too guilty. Most Canadians play catch-up with last year’s RRSP contributions after the New Year. The problem with this strategy is threefold:
Every dollar of income taxes are subtracted from your pay is one less dollar you can put to work for you. Instead, it’s being put to work for the government.
When you file your tax return, and get a refund, you have informed the government about the deductions and credits you normally claim throughout the year (e.g. Those generated by RRSP contributions, tuition & education expenses for your child, deductible interest, etc). To lower the amount of income tax deducted from your paycheque, tell Canada Revenue Agency about these deductions and credits ahead of time.
Instead of playing catch-up with your RRSPs, set up an automatic withdrawal plan to transfer money from your bank account to your RRSP investment.
Example: Your usual RRSP contribution each year is $6000. Instead of making a lump-sum contribution, you break up the contribution into $250 payments that are invested bi-weekly. Not only is this more manageable, your first $250 has had one year in the market to grow. The next contribution has one year less two weeks, etc.
It makes more sense to have the withdrawal come out the same day your pay is deposited into your bank account. This way, you won’t be tempted to spend it. The resulting increase in your take-home pay should be used towards building your savings automatically. If you then deposit that money in a Tax Free Savings Account (TFSA), not only have you avoided having to pay tax on the income, you also won’t pay tax on any of your investment growth. As with all investments, this should be done automatically as well. Your monthly budget will be the same, but you will build a decent investment portfolio instead of waiting for the government to give you your own money back.
Tags: Investments, Mutual Funds, RRSP, Tax Free Savings Account, Tax Planning, Taxes, TFSA
Posted in Investments, RRSP, TFSA, Tax Planning | No Comments »
Thursday, October 15th, 2009
A: For the 2009 taxation year, the RRSP contribution deadline is March 1, 2010. Any contributions received after this date will apply to your 2010 tax return, not your 2009 return. As for how much you can contribute, that depends on your earned income in 2008. At the present time, Canadians can contribute up to 18% of their earned income in the previous taxation year, up to a pre-defined limit. For the 2009 taxation year, that limit is $21,000. The limit will increase by $1,000 in 2010.
Carrying forward can be a good idea, providing you are moving into a higher tax bracket in the near future. Otherwise, you may be passing up on a significant tax break. First, you sacrifice immediate tax savings in the form of a large tax deduction. Second, you lose the tax-deferred growth within the plan; in just five years, this amount can be significant. And third, carrying-forward indefinitely is certain to make it financially difficult to “catch up” in the long run—many people never do.
A: While waiting until the end of February appears to be a tradition among many people, it certainly isn’t the best way to go. For starters, you lose the benefit of up to 14 months of tax-free compounding. Second, you must make your investment decisions in a rush, rather than taking the time to consider the most prudent alternative.
A: Well, if you have a non-registered investment account, you can contribute securities you already own—GICs, treasury bills, qualifying stocks or bonds. This will allow you a deduction equivalent to the value of the securities at the time of contribution. Keep in mind that capital gains from this transaction are taxable, but capital losses won’t be recognized.
A: Yes, you can withdraw money from your RRSP at any time. Such withdrawals must be reported on your tax return for the following year. Unless you withdraw your RRSP funds under a federally-sponsored program (for example, the Home Buyers’ plan), you will be unable to pay the withdrawal back to your RRSP. That means your retirement funds will be permanently depleted, sacrificing the opportunity for compound tax-deferred growth. In the long run, using RRSPs as an emergency fund is not a good option.
A: Under federal regulations, all RRSPs must be “collapsed” at the end of the year in which you turn 71. At that time, you’ll have three options: (a) cash out your RRSP in its entirety (and pay all appropriate taxes); (b) buy an annuity; or (c) roll over your RRSP into a Registered Retirement Income Fund (RRIF). For most Canadians, a combination of options (b) and (c) usually makes the most sense. Make sure to talk with a financial professional to find out which option is right for you.
Tags: RRSP
Posted in Investments, RRSP | 2 Comments »
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