RRSP’s were created in 1957 even before we had a public pension plan. Even back then the intent of the registered retirement savings plan was to be the “foundation” or “pillar” of one’s retirement planning.

The idea was to encourage saving by letting you put off paying taxes on those savings until you retire – a time when most people are in a lower tax bracket than during their working years. It sounds like a good idea, provide a vehicle in which most Canadians can participate in at their leisure, and have the taxes deferred into the future, so that you may have more spendable money in your pocket today.

Generally in a typical RRSP program, you have automatic withdrawals coming out of an account on a monthly basis, and then at the end of the tax year, claim the contributions and get a portion of the tax payable back. This seems like a good program except for three big problems.

1) Tax Deferral – One of the top benefits usually touted by RRSP Companies and Banks is that the money grows Tax Deferred for the life of the contract, and then when you need to start withdrawing the money, you will gradually pay the taxes as you receive the income. This sounds like a valid point, and even some accountants will tell you the longer you can avoid paying taxes the better. But this couldn’t be farther from the truth. Because as our contributions grow through market performance and the wonders of compounding, our tax obligation also grows. So if you invested $1 today and you receive a refund back in the amount of roughly $0.32, what happens to the deferred tax as the investment grows through time and compounding? That’s right, it too also grows. So if your $1 compounds into $4 over time, your $0.32 tax refund grows to $1.28 in future taxes owing! Assuming you take it out in the same tax bracket as when you contributed it. So we use the analogy, that if you were a Farmer and had the ability to choose between paying tax on the seeds you put into the ground, or on the entire crop of food grown from those seeds, which would you choose? Obviously the cheap seeds, not the whole crop…

2) Accessibility – One of the things most people understand is that when you put money away into your RRSP, it is for the future, and should only to be used at retirement. This is always the intent at the beginning of a savings program, but unfortunately throughout life we have roadblocks or events that may derail our current plans. We may not only be unable to contribute to our RRSP, but heaven forbid, we need to access our savings. Although not impossible, it is always the last place we recommend taking money from, as it is generally the most expensive place. When you withdraw money from your RRSP, the first thing a company is required to do, is withhold a certain percentage for taxes before it even gets in your hands, and the remainder of taxes will be due when you file your taxes the following year. So if you are in a 32%-42% tax bracket at the time of withdrawal, you will owe a decent amount of money when it comes to tax time…

3) Tax Treatment upon Death – Most people can barely get their minds around the taxing consequences of RRSP’s at retirement time, but when we help them understand what happens to the value of their lifetime investment upon their passing they are generally stunned. Through family law here in Canada, the only person who is entitled to a tax free transfer of your RRSP is your spouse. This means that whatever you don’t use in your lifetime can be transferred to your spouse, without any taxing consequences, but once the last spouse passes away, all the remaining taxes held inside the RRSP need to be paid in full. And the government deems you to have cashed out all of your holdings the day before your death. And taxes are calculated on your final year of income, so if you had received $50,000 of income from that year, but you had an RRSP balance of $150,000 when you passed away, the government looks at you receiving an income of $200,000 in your final year, which would bump you into the 46.4% tax bracket, the highest rate of income tax payable to the Government of Canada. Ouch…

Although it is necessary to save for the future, there is a tipping point, when RRSP’s are not the best choice for Investing. Call our office today to see how we can use an RRSP to compliment your retirement strategy, and not dominate it.

Only 2 more weeks in RRSP season, call us today and we can “Pressure Test” your current plan… And may be able to recommend some alternatives that you may not be aware of…

Related Articles…

Should you pay Taxes on the Seed or the Crop?

The Safety of Bond Funds in your RRSP for 2012…

The Top 5 Ways to Protect your RRSP in 2012…

Top 5 ways to Supercharge your RRSP in 2012…

What is an RRSP and 5 things you need to understand to fully take advantage of this Canadian Savings Vehicle.

RRSP’s have come a long way since their introduction in 1957, and they have increasingly become more and more popular among Canadians. Usually in the months of January and February of each year, the airwaves are jammed full of RRSP ads and commercials.

This is a good thing because many Canadians need to be reminded of this Government regulated Savings Vehicle, but there are 5 things you need to fully understand when investing in an RRSP.

1. It is a Tax Deferred Savings Vehicle, not a Tax Free Savings Vehicle.

This means that you get the Income Tax Savings today, and as the investment grows there is no tax due on the growth, or the loss of the investment you choose inside of your RRSP. But the taxes will be due some day into the future, and you will slowly have to pay back the accumulated taxes as you withdraw your money from the RRSP. So remember it is not Tax Free, it is simply Tax Deferred into the future, generally years from now, but it will still be due.

2. There are maximums that you need to be aware of.

You cannot simply inject as much money into the RRSP as you want, as there are maximums which will govern your allowable contributions. In 2011 the maximum amount of money you can contribute into your RRSP will be $22,450 for the 2011 tax year, but the second condition is a maximum contribution of only 18% of your previous years income. So if you made $100,000 in the 2011 Tax Year, you are only allowed to contribute the maximum of $18,000 to your RRSP. To contribute the maximum amount of $22,450 you would have needed to earn closer to $125,000 to claim the maximum amount.

3. Carry Forward.

One of the benefits of the RRSP Contribution limit, is that if you do not use it all in one year, the unused portion will be carried forward to future tax years. So in 2011 if you do not use all of the contribution room based upon your income, any unused room will be carried forward into the next tax year, and so on and so on. So after years of not contributing to an RRSP, we find many individuals have quite a bit of unused contribution room that they can use to offset taxes owing. But remember, it is not wise to make RRSP contributions in excess of what your Income would be in any given year, you may want to spread the contributions over a few years, to get the maximum tax deduction benefits. As an example, if you made $75,000 in a tax year, you would not want to contribute $100,000 into your RRSP, as you will be wasting the carry forward benefit. Making one deposit this year, and one next year could be the smartest thing to do.

4. As your RRSP Grows, you will owe more and more taxes.

One thing to remember is that taxes are only Deferred inside of an RRSP, but they never go away. What people need to realize is that the tax deduction you receive today, could cause huge taxes owing into the future. If you invest $100.00 today, you will generally receive $30.00 back as a refund, assuming you are in a 30% tax bracket. But as that $100 grows into $200 over time, your tax owing will also grow. So the $30 refund you receive today, will grow to $60 of tax owing into the future at your same tax bracket of 30%. So remember as your RRSP investment grows so does your tax obligation to the government! It is not tax free, only tax deferred…

5. To get the maximum value, you must re-invest the Tax Refund.

When you contribute to the RRSP, unless you are using a Group RRSP through your employer, you are investing with After Tax Dollars. This is why when you do your taxes in April, and submit your RRSP slips, you generally receive a refund. But that refund is a repayment of your own money that the government has had for the previous tax year. So to get the maximum value of your RRSP dollar, you must re-invest the Tax Refund into your RRSP. Most people do not do this, and this can have an even more devastating effect on the Taxes Due inside of your RRSP into the future. As illustrated in the example in Number 4. above, if you take that $30 from the refund and spend it, instead of re-investing it back into your RRSP, then you will have spent the $30 today, and could have a $60 tax obligation in the future!

We believe that RRSP’s are good for the majority of Canadians, but contributing too much or relying solely on your RRSP as a savings vehicle, will give you limited options in retirement. By using an RRSP as only a part of your retirement plan is the most logical way to take advantage of this Savings Program.

Because it is not only how much you have, but how much you keep, which is the most important part of creating a sustainable, tax efficient income in your Retirement Years. It has been estimated that there will be roughly $1 Trillion dollars of unpaid taxes sitting inside of Canadian RRSP’s at the height of the retirement boom!

Call our office today, and find out how we diversify our clients assets, so that an RRSP will compliment your retirement and not dominate it…

Steffen deGraaf

It’s that time of year again. The time when people rush to make the RRSP Deadline for 2011.

Here in Canada the CRA or Canada Revenue Agency, allows residents to contribute to their RRSP within the first 60 days of the following Calendar year. And this year is a leap year as well, so we are given 1 extra day to contribute!

The RRSP contribution Deadline for 2011 is February 29th 2012. This means all contributions must be made before March 1st 2012, and since we have a leap year, that means we have 1 more day than normal this year to contribute. But why the rush? Why do so many people wait until the last minute to contribute? As it is a fact that over the last 50 years of investing,  those who contribute systematically, ie monthly will always beat a 1 time deposit at contribution time.

Even in RRSP investing, it is all about supply and demand. Demand for Investments goes up between January and March consistently every year, in 2005 we saw the trend, in 2006 same, in 2007, 2008, 2009, 2010, 2011 and now it is trending higher again for the rush to Invest.

So by using a systematic approach to investing, by setting your RRSP up on a monthly PAC program, you will benefit by Averaging out your purchases of Investments. When the prices of Investments are high, you will buy fewer units of that Investment, and when the prices of Investments are low, you will buy more units of the same Investment. That way by the end of the year, you will have made a better return simply by setting your RRSP on Autopilot.

As well the maximum allowable contribution to your RRSP in 2011 is 18% of your Income, up to a maximum of $22,450.
Any un-used RRSP room will be carried forward for use in future years. So if you only have $10,000 to contribute for this year, $12,450 will be carried into the future. This is important as it will allow you to make large deposits into your account in the future, and can potentially eliminate taxes due in a future year of income.

Here’s how it can work for you…
Lets say you have an RRSP maximum contribution limit that you have been accumulating over the years, and it has now added up to say $75,000. And maybe in the year, you receive an inheritance of $75,000 from a deceased relative. You can take that $75,000 and directly invest it into your RRSP account, and you will make the first $75,000 of Income in that year, entirely Tax Free. Now if you didn’t have the contribution room, or the income of $75,000 for that year, then the numbers would be adjusted, but it gives you an idea of how the Carry Forward can work for you in the future.

Another Great Idea for your RRSP.
What about an RRSP catch up Loan? Here you can make one large deposit, and pay for it into the future. So if you have a heavy tax obligation for 2011, and you have a lot of unused RRSP Contribution room, you can use this strategy to reduce your taxes today, while paying for the loan over a specified period of time, such as 1 year, 2 years, 5 years or even 10 years. This way you get the benefit of Investing today & the Tax Deduction of today, without the financial burden of trying to come up with a huge sum of money.

There are many ways to maximize the value of your RRSP, but you have to do it before March 1st 2012, or you will lose the Tax Deduction of an RRSP for the 2011 Tax Year.

We help so many people throughout the year, but it is certainly the busiest time of year between January and March, please give our office a call today, and see how we can help you out as well. We have no minimum account values to work with our clients, so if you have $1,000 or $100,000, we are here to help either way. As well, we do not charge any fees to our clients, as we are paid by the Financial Institutions whom we place your money with. This is one of the great benefits of working with an Investment Broker, as opposed to one of the Big Banks.

Steffen deGraaf

Check out these great Articles too!

The Safety of Bond Funds in your RRSP for 2012…

The Top 5 Ways to Protect your RRSP in 2012…

Top 5 ways to Supercharge your RRSP in 2012…

For anyone who is sick and tired of the Volatility of the Toronto Stock Exchange, I would suggest to look at the safety of a Bond Fund…

For years the “Guru Economist’s” have suggested to get out of bonds, as interest rates are at historical lows, and the fees associated with Bond Funds can outstrip their returns… Hogwash I say!

I can point to an article published by the Globe and Mail’s Rob Carrick Personal Financial Columnist in September of 2010, with the article titled “Stop Buying Bond Funds”…

In the article the columnist points out that the Bond Fund Universe was about to collapse upon itself, and that the run was over for the safety of Bonds. This has proven to be the complete opposite since the article was published.

In the same article Avery Shenfeld of CIBC was quoted as saying “There’s little prospect of a rally here, so the odds are that yields begin to rise and bond funds perform relatively poorly.”

Fact: Bond Funds were the only consistent positive performers of 2011…

Here are the top 5 reasons why you want to have some of your RRSP assets in a Bond Fund, contrary to what the “Guru’s” have to say…

1. Safety.

Bond Funds in their nature are a Safe Place to park your retirement money until you are ready to use it. A good Bond Fund will weight the fund with both long and medium term bonds.

2. Ability to hold Long Term assets for a shorter Term.

If you as an individual investor wanted to purchase a specific bond, you would have to hold the Bond until its maturity date, which may be years into the future. When you invest in a Bond Fund, the Fund itself will wait for those assets to mature while you are given the ability to use the money much sooner than the bonds actual maturity date.

3. A Bond Fund doesn’t necessarily invest all its money in Canada Savings Bonds.

When we hear people talking about the negatives about Bonds, they are talking about the individual Bonds themselves, not Bond Funds. Bond Funds invest your money in a variety of Bonds, such as Municipal Bonds, good Corporate Bonds and maybe some International Bonds. When you combine them all together, you are getting a far better rate of return than a Canada Savings Bond, no matter how long you hold it for. Currently the 10 year rate for Canada Savings Bonds are less than 2%. The historical return of a Bond Fund is closer to 5% across the board over the last 60 years worth of tracking.

4. A safe place to take your money from when the markets are in a downward spiral.

If you are in, or nearing retirement when there is a financial crisis, there are two things you can traditionally do, Don’t Retire, or Take a loss by cashing in your depreciated money in the Stock Market. What is interesting is that when stock markets fall, bonds rise. As money never really leaves the market, it just moves around in the market. By using a Bond Fund, if the market is down, you can let your stock market assets sit there, and simply take your retirement funds out of the safety of the Bond Funds. And when the market recovers you can start drawing off your stocks again. Simple.

5. Bond Funds can be re-invested in the stock market when a recovery occurs, or when Interest Rates rise.

When you actively watch or manage your money, as we do here for our clients, you still have control over the RRSP and how it is invested. If we agree the Toronto Stock Exchange is on the rise, we can move some of the Bond Fund Assets into the stock market to try and beat the 5%. As well, if Interest Rates start to rise consistently, then again we can move the money out of the safety of the Bonds, and back into the markets.

One of the things you should realize is that someone needs to be Guiding you through the cycles of your RRSP investing life. When you are younger the ability to recover from a market crash in time for your retirement years is much easier, but as you get older, you must be as protective as you can and avoid the dramatic swings of your RRSP account.

As there are only two outcomes of being too risky with your RRSP in your Retirement Risk Zone. Either can’t retire when you wanted to, or you have to live on less if you do choose to retire. Talk to us today, and we will show you how we can help you protect your money.

Steffen deGraaf

If 2011 were any indication of the volatility in the world of Investing, then read further to Learn about how you can Protect your RRSP in 2012.

Step 1. Look at using Segregated Funds instead of Mutual Funds.

Segregated Funds are pools of assets similar to Mutual Funds, but with many significant benefits. The first benefit of a Segregated Fund, are the Guarantees they carry. The first powerful guarantee is the Death Benefit Guarantee. This Guarantee will return all of the deposited assets to the beneficiary, even if the account value has dropped. This is one of the best ways to protect your RRSP against the timing of death and volatile market values. If a client had deposited $100,000 into a Segregated Fund, and passed away when the market value had been depressed to say $70,000, the beneficiary would receive the entire $100,000 back. If this same deposit was in a Mutual Fund, the beneficiary would only receive $70,000 back. The other powerful Guarantee is the Maturity Guarantee. You can have a Maturity Guarantee of either 75% or 100% of your initial deposit. This means that after 10 years, if the market is in decline, you can still withdraw your initial deposit, even if the market is down.

Step 2. Consider a GMWB Guarantee on your RRSP.

A GMWB or Guaranteed Minimum Withdrawal Benefit helps our clients think about Income, and not just Savings. A GMWB acts like a personal pension, whereas you get a minimum rate of return inside the Investment Account, which is credited towards your Income. This allows you to receive a 5% Guaranteed Income Bonus every year you are invested, or the market value, whichever is higher. This way you can actively participate in the Stock Market, but get a base Guarantee of 5% if the Market does not perform well, or even loses money. This type of powerful guarantee has been incredibly well received by our clients in 2011. Because even though the market fell -12% in 2011, our clients Income Base was increased by 5%, try doing that with a Mutual Fund or GIC. Also by using the GMWB strategy, when you turn your Savings into Income at retirement, because it is a personal pension, you are guaranteed to receive Income for Life, no matter how long you live.

Step 3. Reset the Value of your Segregated Fund Accounts.

Another one of the many benefits of a Segregated Fund, is its ability to Reset your Initial Deposit. This means that not only is your initial deposit guaranteed, but even the interest it accumulates can be guaranteed through resets. In the first step we talked about the account declining from $100,000 to $70,000, but if the markets are in a rise, and the value of the account had increased to say $125,000, then your new guaranteed amount would be $125,000, and it can never go down, no matter what happens in the market. So if you have Segregated Funds, and your account value is higher than your original deposit, make sure to reset your guaranteed amount. This is a great way to protect your RRSP.

Step 4. Check your Beneficiary Designation.

Did you know that many Mutual Funds do not have a Beneficiary Designation? You also cannot make a beneficiary designation on a GIC or Term Deposits. If you were to pass away without having a proper beneficiary designation, you could be putting your spouse through a lot more work and effort than they need to be. It is a very simple process, and it stays outside of the Will, so that the assets can flow directly and efficiently to your Beneficiary (Generally your Spouse). By using a beneficiary designation, and Segregated Funds, you can bypass Probate on the account by using a Beneficiary Designation. So its not only a smart thing to do, but will also save your estate thousands of dollars in Probate and associated Fees.

Step 5. Be Conservative in 2012.

Many times we meet with a client who does not understand their RRSP Investment Account, or how the money is actually invested. This is the number one mistake people make, and this is why portfolios are down across the board. You must understand how your money is invested, and how much of it lives in the volatility of the Stock Market. A good Conservative mix should be built similar to this, Bonds/Dividends/Equities. This way you have a good base of solid income through your Bonds, a good Dividend Fund with a strong track record will be the next riskiest Investment, and finally an Equity component will help you keep up with inflation. Even if you are in a bad Market, you can draw your income off of the Bond and Dividend component of your portfolio, and let the Equities recover. This way you never really “lose” money in the markets other than on paper, but it does not have to affect your Income or your Lifestyle.

By following the 5 Steps above, you should be able to weather the storm, and face any challenges that the Stock Markets throw at you. If you need help in implementing any of these strategies, please give our office a call. It can make the difference between worrying about your Account, or being able to sleep at night, no matter what bad news is shown on the Evening News…