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RRSP Deadline

The 2010 RRSP deadline is March 1 2011.  If you are planning to get an RRSP (Registered Retirement Savings Plan) this year time is running out.

Investing with Values

There is no doubt many things in the world are currently broken, and it no secret that money is often a motivation for many of these issues.  When choosing where to invest your money there is an option that I like, as it fits with my values.  SRI or Socially Responsible Investing.  This option varies between the providers; however the concept remains the same.  First there is a list of areas that they will not invest.  Second they rate all companies left and have a minimum score for them qualify for investment.  Third is advocacy, where they consult, make recommendations and use shareholder rights to encourage positive change in the companies they own.  The three areas of focus are Governance, humanitarian and Environmental.

What I really like about this style of investing is they are clear on the filters, then work with the companies to make things better.  This collaborative process not only improves the company, but in most cases improves profitability.  Doing the right thing works and this process has many success stories to prove it.

SRI investing offers the ability to grow your investments, while supporting positive change in the companies you invest in.

RRSP Calculator

It is common to wonder how much difference your RRSP (Registered Retirement Savings Plan) contribution will make.  Below is a link to a great online tool that can help you plan and make sure you get the most from your money.

http://www.fidelity.ca/cs/Satellite/en/public/education_planning/calculators/tax

Vancouver RRSP Solution

We do maintain an office in Vancouver, however for many our mobile solution seems to be much more convenient.  We are happy to come to your office, home or local coffee shop.  We can offer full RRSP (Registered Retirement Savings Plan) service, RRSP loan service and a full array or solutions where you are.  No need to fight traffic or wait in lines.  Investing in your future has never been easier.

If you are interested or would like more information please call our office 604 637 7422.

Should I save my RRSP Contribution Room?

Most of us like the idea of saving on tax, so if you have the money to save in a RRSP and you have determined the tax savings are large enough to make it worthwhile, there are still a few situations where you might want to wait to make that contribution.  Below I discuss a couple of situations where even if RRSP’s make sense for you, you may want to hold off investing in an RRSP.

Expecting a buyout?  Many companies offer significant buyouts to long time employees a few years before retirement when trying to cut back staff, labor costs or shift the direction of the company.  Although a large cheque can be exciting it can also create a significant tax issue.  One simple solution to this is to take the buyout and put it in a RRSP.  With this option the deduction the RRSP creates offsets the taxes on the buyout.  As a lump sum like this will often push you into a much higher tax bracket than usual, this is often a great time to use your RRSP room to save tax, that is if you have enough RRSP room.

High income year.  If you get a bonus, or sell an asset (such as a rental house) that sends your income into a higher tax bracket than you normally would be in, this could be worth saving your RRSP room for.

Skip a low income year.  If you happen to make less one year than normal, then skipping the deduction that year may make long term sense.

When planning your finances it is important to look into the future and plan for low income years, high income years and any future financial transactions that may impact your tax situation.

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Using the RRSP “Gross up” Strategy

This is a simple strategy to increase the size of your RRSP (Registered Retirement Savings Plan) without losing more of your income to savings.  The best way to explain the concept is with an example.  To keep the math simple we will say the tax rate is 50% (please note that there is no 50% tax rate in BC, the benefit of this strategy should be calculated at your real tax rate, however for the example 50% is much easier to visualize).

Example, John makes a $4,000 RRSP contribution at our imaginary 50% tax rate.  With this he can expect to save $2,000 on his income tax.  As many put there refund back into their RRSP, the gross up strategy says he should borrow the same amount as the refund and then use the refund to pay back the loan.  This increases the tax savings now and gets the money into your account sooner, giving your money longer to earn interest.  Now if you add a $4,000 contribution and $2,000 refund together and make that your new contribution you would now get $3,000 at our 50% rate, so we need to run through this a few times until the extra tax savings no longer makes much of a difference.

 

Normal RRSP contribution of $4,000 would create a $2,000 tax savings

Gross up RRSP contribution of $4,000 would become $8,000, with a refund of $4000 to pay off the $4,000 loan required to make the contribution.

To see if this strategy works for you can work out the difference at your tax bracket and hopefully with this strategy you can save a little more for retirement, without having to find any extra money.

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Are RRSP’s Creditor Protected?

It wasn’t too long ago that pensions, some locked in retirement accounts and insurance products were the only protected option for Canadian investors in the event of bankruptcy.  For the individual investor only the insurance options were available, as the rest would need to be set up by their employer (if they have one).  However as of July 2008, Bill C-12, an amendment to the Bankruptcy and Insolvency Act changed this.  This change provides the same protection for RRSP’s, Spousal RRSP’s, RRIF’s and some other registered accounts.

Hopefully no one invests with the intention of going bankrupt, but managing risk is about handling what we did not intend.  What this protection provides is a planning opportunity for those who want to protect themselves from this risk.  This could be a business person who wants to protect his retirement savings from business risk or a family hit by the financial devastation that can follow illness or injury.

The money does need to be place into a protected account a year before, and before you know of the pending issue.  The main purpose of this change as I understand it was to extend the same benefits of retirement savings offered to employees with a pension to those who do not have access to a pension.  As always before counting on this protection I would recommend discussing your unique financial situation with a professional as the smallest detail can make a big difference.

A last point would be to consult with a professional before accessing your money if you find yourself struggling financially.   Too often I see people cash out there RRSP’s and other protected investments trying to turn things around, when they could have saved those assets and used them to jump start a new financial life.

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How much can I contribute to my RRSP?

Instead of calculating how much RRSP (Registered Retirement Savings Plan) room you have and risk getting it wrong, I recommend looking on your “Notice of Assessment” which is sent out each year after you file your tax return.  On this form you will find both your TFSA (Tax Free Savings Account) contribution limit as well as your RRSP contribution limit.

If you contribute to an RRSP plan or Pension Plan at work will also need to be considered when determining how much you can contribute.  You are also allowed to over contribute up to $2000.  This is allowed without penalty, however you do not get to deduct the over contribution from your income.  I would use this as a safety net and do not usually recommed intentionally using this room.

Your RRSP contribution room is made up of 18% of your taxable income from the previous year to a maximum in 2010 of $22,000, added to the unused room from previous years as far back as 1991.

The RRSP contribution limit has worked as a great annual savings target for many.  It is very rare to see someone contribute the maximum to their RRSP each year and not have a sizable retirement savings.

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Repaying RRSP Home Buyers Plan

After borrowing from an RRSP (Registered Retirement Savings Plan) with either the HBP (Home Buyers Plan) or LLLP (Life Long Learning Plan), there comes a time when you need to either put the money back into the plan or pay tax on the money.  I do believe saving for the future is good, however putting the money back is not always the best option, here is a common example of when back these plans do not make sense.

Example.  A young couple wants to buy a house; they decided to use the Home Buyers plan for part of their down payment.  A few years later it is time to start putting the money back into their RRSP.  Often they have had kids by this time and one of them may be staying at home with the kids.  If staying at home they likely have no income, in this case I recommend not contributing to the RRSP for this person, but instead make a contribution in the spouses name who is working.

 

What ends up happening is the spouse not earning any money will have to pay tax on the RRSP payment that was owed; often this is nothing or small.  The RRSP room is lost.  However the spouse who has an income makes a RRSP contribution and since they are in a higher tax bracket they receive a bigger tax break.  As a result the same money put into an RRSP gets a bigger tax benefit.

I do believe in saving, however just because there is tax owed if the funds are not returned does not mean it is the best place for you to put your money.  A little planning here can make a big difference.  As always I recommend talking to a professional.  If you have any questions and are in BC I am happy to help.

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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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