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RRSP Beneficiary Designation

RRSP’s (Registered Retirement savings Plan’s) and all registered accounts (RIF, LRSP and other registered accounts) offer the ability to designate a beneficiary, seems simple enough, however there is a list of common and sometimes very expensive mistakes.  Below I have listed a few of the common errors.  It is simple to fix the beneficiary now, however your estate may or may not be able to correct it later.

No beneficiary designated – This means the RRSP goes to the estate, not to a beneficiary.  This eliminates the tax benefits of leaving the accounts to your spouse, and also the creditor protection these accounts often have.  It also means it can be contested with the will and in some cases be dealt with by the guardian trustee or a list of other negative issues.

Wrong beneficiary – A common example of this is in a divorce, where the beneficiary is not updated to the current spouse.  This not only leaves the account to the wrong person, it also can leave the tax bill.

Out dated beneficiary – Often after marriage updating the beneficiary on an RRSP is not top of mind, but updating this is simple, if something happens correcting it later it can be a real hassle.  I have heard of stories of the RRSP account accidently going to the ex wife and the tax bill paid by the current.  Have yet to see this, and with good planning hopefully I never will.

Not naming a spouse – With RRSP’s a disabled dependant and the spouse can receive tax preferred treatment.  The RRSP can roll over into the spouses RRSP with no tax issues on passing if they are named as the beneficiary.  If anyone else is named the beneficiary the RRSP is taxed.  It is normal for many people to want to put their children as the beneficiary.  It is important to consider the tax benefits of leaving it to the spouse before choosing anyone else to be the beneficiary.

Beneficiaries can be on your RRSP, your work RRSP, pensions and many other accounts.  I recommend that you review all your finances at least once a year, and that point check to ensure these details are all correct.  It can make a big difference and save lots of money and stress later.

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RRSP’s and Education

The Life Long Learning plan can be a great option, although I rarely see a fit for it.  The Life Long Learning Plan allows you to borrow money from your RRSP (Registered Retirement Savings Plan) without the tax consequences that you incur when withdrawing the funds.  Below I have listed the common benefits and negatives to make it assist anyone who is considering the LLP.

The benefits

        –  You can borrow from your RRSP to fund your schooling (College, university, trade school).

        –  No need to pay back the funds until after you finish school.

The down side

        –  You do need to pay back the money of face tax issues

        –  If you are not working your income may be low enough paying the tax makes more sense to get the money.

        –  The money does not earn interest while you are using it.

        –  There may be fees involved in accessing the money.

If you are not working while going to school, often it is a low enough income year that taking the money out of your RRSP can make more sense, and if you are working it is usually possible to pay for school out of your existing income.  When it does make sense it works great and then I would recommend talking to a professional planner and visiting the Canadian Government website for the current details as they can change over time.

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RRSPs and Buying a Home

Using your RRSP’s for a down payment on your first home is common, and with the home buyers plan you can borrow money from your RRSP (Registered Retirement Savings Plan) account without the tax penalty usually associated with accessing the funds in your RRSP.  So does borrowing from your RRSP make sense?

Like so many financial choices it depends on what you want to accomplish and your unique situation.  Considering both the benefits and negatives of using this program is likely the best way to see if it makes sense for you.

The benefit is simple.

          –  if you have money in your RRSP’s it allows you to use this towards your down payment, without having to pay tax on the money withdrawn.

          – If you are in a high enough tax brackets, you can contribute to an RRSP and use the contribution as well as the tax return towards your new home, creating an even bigger down payment.

          – Larger down payment can save you CHMC insurance fees.

          – Larger down payment can reduce the monthly mortgage payment.

          – Larger down payment allows you to qualify for a more expensive place

So why would you not want to borrow from your RRSP?

          – When you borrow you do not get the growth in your investments you otherwise would.

          – You risk putting off the tax issue until a later time if you do not make the repayments, and the repayments will be due once you have a mortgage, making repayment harder.

          – You lose the diversification of investing in both your RRSP and I a home.

          – RRSP’s are creditor protected, your home is not.

          – Possible fees involved in taking the money out of the RRSP account.  These vary depending on how you invest and with whom.

          – RRSP’s are more liquid.  If something unexpected happens you can use the RRSP’s if need be, to get money out of the home you may need to remortgage or sell, both expensive options.

I often recommend clients use the Home buyers plan.  Many people pay CMHC fees as they don’t have a large enough down payment to get past these fees.  In many cases we use a contribution into an RRSP and or Spousal RRSP.  By including the tax refund and using money already saved for the down payment, this creates a much larger down payment.  Other times an existing RRSP is the down payment, allowing the purchase of a home to happen sooner.  This can save money that would have been wasted on rent or just make for a better lifestyle.

Home buyers plan is a great option, with many benefits, draw backs and restrictions.  When planning I believe that discussing your situation with a professional advisor or planner who you trust will help you make a quality and informed decision.  The details of the home buyers plan do change from time to time, so I would also recommend looking on the government of Canada website for current information before using this program.

With housing cost in Greater Vancouver as high as they are, often any detail that can help first time home buyers getting into the market can make a big difference.

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Do RRSP Loans make sense?

Every year a many people run out and get RRSP (Registered Retirement Savings Plan) loans, so do they make sense.  Like most financial tools they work some times and not others.

So why would I want an RRSP loan?

  • Some can only save through debt
  • To save tax in a high income year
  • Temporary for “Gross up” Strategy (covered in a later blog)
  • Make a contribution now, when expecting money soon
  • Other unique life situations

 

What to watch for in an RRSP loan?

  • Cost of the loan compared to the the tax savings
  • Increased debt can reduce cash flow and ability to get debt
  • Loan payments must be made, no breaks in hardship
  • Lumping money into the markets at one time has risk

 

What to consider before taking out an RRSP loan

  • Can I afford the payment?
  • How long will it take to pay off the loan?
  • How much interest will you pay?
  • How does interest compare to the tax deduction?

 

I believe that it is often better to contribute to your RRSP monthly instead of making loan payments long term.  By putting money into your RRSP every month you get the benefit of dollar cost averaging and waste none of your money on interest.  The biggest benefit I have found to RRSP loans is the level of commitment people have to loan payments.  A debt payment is a commitment, but a monthly contribution is easily set aside for any other priority.  If you are committed to saving, the monthly contribution is likely the best option.

As a general rule I try and keep RRSP loans below 2 years, this usually reduces the interest rate, keeps the interest costs down and by keeping debt low it allows us flexibility in life as something unexpected always seems to be around the corner.

RRSP loans can be a great option in many cases, personally I can think of a few different situations where I would use an RRSP loan, but to date have never used one for myself as I prefer to avoid debt in my life. The right answers for this, like most, is the solutions that fits with you.

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RRSP or Spousal RRSP?

One option that RRSP’s (Registered Retirement Savings Account) offer that is underutilized is the Spousal RRSP.  With this you can contribute to the RRSP and get the full tax deduction; however the funds are invested in the spouse’s name.

In the last post I discussed if an RRSP contribution should be made in your name or your spouse’s name.  A spousal RRSP allows you to plan for income splitting later, where contributing in your spouse’s name allows for income splitting today.  With the addition of the option to share pension income in retirement this is not as critical as it once was, but still a worthwhile step.

Income splitting in retirement is important; however this can be of benefit if you need to draw out funds in a low income year.  Although this doesn’t seem likely, it is frightening how often due to illness, passing, injury, layoff, career change or other random events an unexpected need for funds is created.  RRSP’s and Spousal RRSP;s are not ideal for an emergency fund, but often is needed for this purpose.  By balancing out the RRSP’s (yours and your spouse’s) you maximize the potential that you will have the money necessary, in the most tax efficient way possible from an RRSP.

Although the future is full of unknowns, taking simple steps can give you more options and make dealing with issues as they arise much easier.  The best way to ensure you address all the relevant details and possibilities involved in planning your finances is to speak with a professional advisor.

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My RRSP or My Spouses?

When making an RRSP (Registered Retirement Savings Plan) contribution we often just set it up in our name.  However if you are married or common-law, working towards your financial goals can have a huge impact on your financial life.  If you and your spouse are working together towards your financial goals and considering an RRSP then this simple step could save you a lot of tax.

To understand how this works, we need to understand how our tax rates work.  Tax rates increase as your income increases at set income levels.  What is important to note is as the rate goes up it is always on the next dollar earned.  This means if you make $30,000 or $130,000 you pay exactly the same amount of tax on the first $30,000 in both cases, the only difference with $130,000 is you need to also pay tax on the next $100,000 as well.

So contributing to an RRSP in your name or your spouse’s name becomes a tax question, who saves the most tax?  In many cases the simplest way to save on tax is make both incomes the same.

If a couple has the annual earnings of $150,000 a year and they each made $75,000 they would pay the same amount of tax each and this would be the lowest amount of tax  they could pay on $150,000.  If you increase either income as it moves into the next tax bracket, even if the total income still equals $150,000 the total tax payable increases as the income shifts to either spouse.

With this we know that it is optimal to bring both incomes to the same level.  This is where RRSPs can help, if you want to contribute to an RRSP, contribute to the RRSP of the higher income earner.  This will bring the higher income earners tax bracket down, once you and your spouse are being taxed at the same rate you can apply any additional RRSP contributions equally to both spouses RRSP’s.

Example;  If one spouse makes $60,000 and the other makes $50,000, if you were going to make up to a $10,000 RRSP contribution you would want to make it on the $60,000 income, any more and you would want to split it equally between both spouses.

Considering the tax consequences of any of your important financial decision, especially investments are important when planning your finances.  Income splitting now and in the future is a simple income splitting tools commonly overlooked.

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RRSP versus Paying down your Mortgage?

I believe that for most the answer is both.  In meeting with clients one of the most celebrated financial accomplishments for many is when they are finally debt free.  Saving outside of the mortgage in an RRSP offers diversification.  Too often if you save only in the home, it often means borrowing against the home or selling it to fund retirement.  If you choose both, paying down the mortgage and contributing to your RRSP you end up with a home and funds to draw from in retirement.

If you want a more math based answer it can be found in my previous post (TFSA Versus RRSP), paying down your mortgage for tax reasons can be compared to a TFSA, no tax benefit on the money in, no tax on the money out (usually), and no tax on the interest saved.

I believe the answer to this question lies in your ideal balance.  Some people need more money saved to be comfortable, others feel more comfortable with less debt.  The second consideration is how you spend.  If you buy a more expensive home every time you have a little equity, RRSP’s would likely provide a bigger retirement savings.  If you are likely to pay you home down quickly, and then stay there while building your savings then your balance may be towards paying down debt.  The third consideration is what would make you feel more successful, I find the more we do that makes us feel successful, the more success we tend to have.

RRSP’s have one other advantage; the courts have ruled that an RRSP can be creditor protected.  There are criteria that need to be met for this.  This can make a big difference if you ever find yourself in bankruptcy.

With current interest rates so low, I feel paying down debt is more important than ever.  If you choose to pay $500 a month into an RRSP, you will never be forced to increase this and could stop the RRSP payment if things change.  This contrasts a mortgage where every time your mortgage comes up for renewal, or with a variable ever time the rates change you risk a larger mortgage payment, and you cannot simple choose not to pay the mortgage in most circumstances.  Paying down your mortgage protects you if interest rates rise, or life requires you to lower your expenses.

Whichever you choose, saving money and building net worth will only make your financial life easier.  Saving with the wrong option is better than not saving at all.  The best way to choose which is right for you is through a conversation with a professional advisor.

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Should I take money out of my RRSP?

Taking money out of your RRSP (Registered Retirement Savings Account) can cause create a tax bill and loss of that RRSP room.  So it is important to consider carefully before taking this step, however if done right it can be beneficial.  RRSP is a tax deferral tool, eventually you will have to pay tax on the money, so if it makes sense to pay the tax now it can be a big win.  Some of the reasons you may want to take money out or your RRSP and pay the tax now are;

  • Home buyer plan, if it for a down payment on a home you may qualify to take the money from your RRSP, you will need to pay it back, however this is a way to get the funds without the tax issues.
  • Life long learning Plan, if the funds are for your schooling this may offer an option to borrow the money without the negative tax implications.  You will need to repay the funds once you are finished school.
  • Low income year.  If you have a low income year you may wish to take the funds out of the RRSP.  This should be carefully consider as you give up that RRSP room, tax deferred growth of the funds and could owe taxes on the money.  With all the drawbacks it can often make sense and leave you with more money long term.
  • Just need the money.  RRSP’s are not ideal for short term saving.  If you choose to take money from your RRSP you may face fees, loss of retirement savings, and a tax bill.  With all this if you need the money and the RRSP is the best place to get it then it may be necessary.  To prevent this we should all have savings to draw from when unexpected expenses strike.
  • Preparing for Retirement.  Once you hit retirement you not only have income tax, but pension claw backs.  For many moving from the RRSP.

When looking at making a withdrawal for your RRSP it is important to consider the negatives before making your decision, and discussing with a professional that understands your situation and the implications of the withdrawal is the best way to ensure you make the right choice.

  • money out of the RRSP before retirement can make sense.  This is usually the case when your income will be higher in retirement, or you have an offsetting deduction in the years you make withdrawals.

 

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RRSP versus TFSA

Now with the TFSA (Tax Free Savings Account) and the RRSP (Registered Retirement Savings Account) I have seen both win the title of “the best”, so which one is it?

These two accounts are very similar, both give you a limit on contributions, both allow your investments to grow without tax and both have a long list of different investment options.  The biggest difference is in when you receive the tax benefits or with RRSP’s potentially the bill.

With a TFSA when you contribute there is no tax savings, but when you pull the money out it is all tax free.

With an RRSP when you contribute you can deduct the contribution from your taxable income, but when you pull the money out the entire withdraw is taxable.

For short term savings the TFSA usually makes more sense.  For long term savings they both offer benefits.  To maximize the benefit a general rule is if you will have more taxable income in retirement the TFSA should work better.  If you will have a smaller taxable income in retirement then the RRSP will likely be the better option.  It is also important to remember it is not RRSP or TFSA question, in many cases using them both for different reasons makes the most sense.

Whichever option you choose, saving money and building net worth will only make your financial life easier.  Saving with the wrong option is better than not saving at all.

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RRSP Checklist

When considering an RRSP these a the more common questions to consider before jumping in.

1.  How does it compare to TFSA? (link to blog)

2.  How does it compare to Paying down debt?  (link to blog)

3.  Should I contribute in my name or my spouses?  (link to blog)

4.  Should the contribution be spousal?  (link to blog)

5.  RRSP loan or not? (link to blog)

6.  Does it make sense to plan to use Home buyers Plan?  (link to blog)

7.  Does it make sense to plan to use lifelong learning plan?  (link to blog)

8.  Would taking money out of an RRSP make sense?  (link to blog)

9.  Considerations for Repaying Homebuyers plan or lifelong learning plan?  (link to blog)

10. Designating a beneficiary on your RRSP.  (link to blog)

11. How much can I contribute to an RRSP?  (link to blog)

12. Is a RRSP Creditor protected?   (link to blog)

13. How can the gross up strategy increase your RRSP account size?     (link to blog)

14. How does an IPP compare to an RRSP?      (link to blog)

15. Should I save my RRSP contribution room?      (link to blog)

Over the next few blogs I will address each of these questions.

We offer the traditional financial reviews at our office and also offer a mobile solution were we will come to you.  This means we can come to you for all your RRSP needs, no waiting in line or fighting trafic to our office.  To find out more please follow the following links, 

Surrey, Langley, White Rock / South Surrey, Vancouver

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