July 11, 2012

Top 8 FAQs About RRSPs

Here are the commonly asked questions about RRSPs we have received:

RRSP or TFSA?

In short, usually both.  TFSA contributions are usually considered a short term savings vehicle for vacations, a new car, or even a child’s education where the RRSP is a more long term for your retirement years.  Your financial strategy should contain a balance of both vehicles for more efficient tax saving.  A financial plan can provide the path to help you meet your short term and long term goals.

How often can I contribute to my RRSP?

Many companies allow you to contribute weekly, bi-weekly (every 2nd week), semi-monthly (twice a month), monthly, quarterly, semi-annually (twice a year) and annually. Pre-authorized withdrawals from your bank account are the most efficient way to contribute.

Most companies require a minimum deposit of $50 per frequency (above) however there are still some companies that will accept as low as $25.

Should I use my RRSP for a purchase my first home (Home Buyer’s Plan ) or to pay for my education (Lifelong Learning Plan)?

The Home Buyer’s Plan and Lifelong Learning Plan are great programs offered by the federal government where you have the opportunity to withdrawal limited amounts from your RRSP tax free. You must repay the money borrowed from your RRSP (no tax deduction this time) over a long period of time (15 and 10 years respectively). If a repayment is not made in any year that amount is added to your income.

By removing money from your RRSP prematurely you risk the loss of tax free compounded growth. The contribution room you used to deposit into your RRSP is also lost. These plans can be detrimental to your retirement savings strategy if not planned correctly.

However, there is a strategy that works well if you have all the components:

You both have a large amount of contribution room; you have a lump sum (ie up to 20,000 each for the downpayment); you have both at least 90 days in advance of when you need the money back.

Contribute to your RRSP ($40,000) and receive the tax deduction/refund for it. Then after 90 days you withdraw the money under the Home Buyer’s Plan. You will have the advantage of receiving your tax deduction/refund and the ability to repay it at a rate of 1/15 a year over the next 15 years.

How can I find out how much contribution room I have?

After you file your tax return each year, Canada Revenue Agency mails you a summary called a “Notice of Assessment”. Your contribution room information is located at the bottom of page 2 in the section called RRSP Deduction Limit Statement.

You can also register for access to “My Account” with Canada Revenue Agency at www.cra.gc.ca/myaccount . With “My Account” you have various options – you can view your RRSP limit, TFSA limit, set up direct deposit, view your past returns and much, much more.

What are the advantages of contributing to my wife’s RRSP?

Spousal RRSPs are an investment strategy used to split income earned. The higher income earner contributes to the lower income earner’s RRSP and receives the tax deduction at their higher tax rate resulting in more tax reduction or refund.

When the RRSP is withdrawn years later (minimum 2) the income is charged to the lower income spouse who pays a lower tax rate.

I have retired from my job (forced) of 40 years but I am not old enough to receive OAS yet. I have 3 more years to go. What can I do?

Every client’s situation is different so I recommend you talk with a financial planner. You should start by looking into your Canada Pension Plan benefits and consider using your RRSPs now to help fill the gap of income needed until you reach 65. Since you will now be in a lower tax bracket, your taxes will be minimal. Planning early for these types of situations is imperative.

Is the RRSP still relevant?

Most definitely! RRSPs are still one of the most significant tax saving vehicles we have as Canadians. With the tax sheltering and compound growth advantages combined with a minimum 5% annual guarantee rate of return segregated fund contract we can offer, it creates the perfect investment to accelerate your growth.

Thom & Associates sells segregated funds, why do you recommend them instead of mutual funds?

Segregated funds, sold only by life insurance companies, offer many advantages over mutual funds. All seg funds offer maturity and death benefit guarantees and some even a minimum annual 5% rate of return guarantee.

Transferring your investments directly to your named beneficiaries when you pass creates an extremely efficient estate savings strategy. With mutual funds, your investments form part of your estate and are subject to probate tax. Segregated funds unlike mutual funds can offer you creditor protection.

As each client is unique, so are our recommendations for investing. In some cases mutual funds can fill a client’s needs and in many cases segregated funds can also fulfill those needs with all these added benefits.

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