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Tax Discussions


How to know when to start drawing on your RRSP

Posted on February 22, 2015 at 2:38 PM Comments comments (1846)

Are RRSPs even relevant anymore?

Posted on February 22, 2015 at 2:30 PM Comments comments (3582)

Five commandments to help boost your retirement savings

Posted on February 18, 2013 at 6:39 PM Comments comments (6206)
Everybody says you should save for retirement. The problem is they don’ttell you when to save, where to save, or what to save. So here are my 5Commandments to Retirement Saving:
1.Thou shalt save a lot when you can, but not when you can’t.
This meansthere are periods in your life when saving is much easier than others. Don’tfeel so guilty about not being able to save much during your most expensiveyears. Usually the best times for saving would be before children, and afterthey are out of the house. This doesn’t mean you should not save for 25 yearswhen the kids are around. What it means is that if you are 29, married, have nokids and two full-time jobs, you might be in a position to save a lot of money.Let’s say your combined incomes are $130,000, your after-tax income is$100,000, and your expenses are $65,000 a year. There is an opportunity to save$35,000. This savings will be very powerful because it has so many years togrow before retirement. At 39, with two kids and a big mortgage, you could bemaking $180,000 but your after-tax income might be $130,000, and you might bespending $120,000 a year, leaving $10,000 for savings. The large savings yearsmight not happen again until you are over 55.
2.Thou shalt not contribute to RRSPs if your income is under $42,707.
While thenumber will change a little each year, the message is the same. It doesn’t makesense to use an RRSP if you are in a very low tax bracket. The reason is thatyou still must pay tax on every dollar coming out of an RRSP, and there is adecent chance that in retirement you might end up paying a higher tax rate thanthe 20% or 24% refund you received when putting the money in. If you have a lowincome in a particular year (or every year), it is usually better to putsavings in a TFSA or if you have children, in their RESP (if you are going to haveto help pay for their education anyway).
3.Over the long term, stock markets go up. Do not be afraid to invest in them.
The generalrule is that you should be quite aggressive with your long-term investments.Over a 30-year period, a 7.5% return will leave you with twice as much money asa 5% return. Over 60 years, it will be worth four times as much. Believe it ornot, for some of today’s young investors, they really do have a 60-year timehorizon. If you are 30 years old, even if you retire at 60, the purpose of yourretirement savings is to last you the rest of your life. That means that whilea small part of your investments have a 30-year horizon, some will actuallyhave a 60-year time horizon if you live until 90. This might mean a 30-year-oldshould have 80%+ of their retirement investments in stocks, and less than 20%in cash and bonds. While the portfolio should get safer as you get older, inmost cases, people should invest their long-term retirement money moreaggressively than they do.
4.Thou shalt never forget about taxes.
As yourwealth grows, taxes become more important. Even for those without great wealth,one simple but little-known rule is that dividends on U.S. stocksface withholding tax in a TFSA, but do not in an RRSP. Therefore, if you haveboth an RRSP or RRIF and a TFSA, hold your U.S. stocks in the RRIF or RRSP. Ifyou have enough wealth that you also have meaningful non-registered or taxableinvestments, you want to maximize the benefits of the tax-sheltered accountslike a TFSA or RRSP. The basic rule of thumb would be that investments withhigh income (whether dividend income or interest income), should be held in atax-sheltered account, and lower-income investments should be held in thetaxable account. In addition, all things being equal, Canadian stocks — whetherthey pay dividends or not — should aim to be held in your non-registeredaccounts if there is room, rather than in your TFSA or RRSP. This is becauseCanadian dividends face a much lower tax rate than interest income. The goal isto hold the same investments across your entire portfolio, but hold them inaccounts that will leave you paying the least amount of tax.
5.Thou shalt not panic at deadline time.
It is trueyou may miss out on a tax benefit if you miss the RRSP deadline, but it is onlytemporary. If you put funds in after Feb. 28, you will still get all of thesame benefits, but the impact on your tax return will take an extra year. Whatyou don’t want to do is to simply put the funds in to get the RRSP credit, butleave the funds in cash or money markets for months or years at a time. It isbetter to take the time to plan your retirement and then the appropriateinvestments, rather than make a mad dash to get funds in but not have aninvestment plan.
Ted Rechtshaffen is president and wealthadvisor at TriDelta Financial, a boutique wealth management and planning firm.

How to move from an RRSP to a RRIF

Posted on February 18, 2013 at 6:32 PM Comments comments (4178)
After years spent paying into a registered retirement savings plan (RRSP),investors eventually have to use the funds as post-retirement income.
RRSPs must be collapsed by Dec. 31 of the year in which the holder turns71. If RRSP savings are not put into a tax-deferred income plan by that time,the entire value of the RRSP becomes taxable income.
A registered retirement income fund, or RRIF, is one of the most commonoptions Canadians choose to convert RRSP savings to tax-deferred income.
“There are generally five types of RRIF, including self-directed, fullymanaged, guaranteed interest, mutual fund, and segregated fund,” says TomHamza, president of Investor Education Fund, a Toronto-based not-for profitorganization founded by the Ontario Securities Commission. “The choice dependson the level of flexibility you are looking for.”
Investments in a RRIF continue to accumulate earnings. “Restrictions applyto withdrawals, not to returns,” says Mr. Hamza. But once set up, nocontributions can be made to a RRIF, nor can it be terminated except by theholder’s death.
While 71 is the maximum age, conversion to a RRIF can begin at any timedepending on the income needs of the holder.
A formula based on age and the value of the RRIF at Dec. 31 of the previousyear is used to determine the minimum annual RRIF withdrawal. Minimumwithdrawal amounts increase with age.
For example, at age 71 the minimum withdrawal amount is 7.38%. If the valueof a RRIF is $100,000 on Dec. 31, the holder must withdraw $7,380 over thecourse of the following year. If the holder is 83, the minimum amount is 9.58%or $9,580; at 90 it is 13.62%.
There is no upper limit on the amount that can be taken out of an RRIF.However, while all withdrawals are taxable at year end, withholding tax appliesto amounts above the minimum.
Under certain circumstances, the tax burden can be reduced. Delayingopening a RRIF until you are 65 or older offers the option of income splittingwith a younger spouse. Income splitting can also help to reduce OAS clawbacks.
“While the full minimum amount must be withdrawn from the RRIF, up to halfcan be given to a spouse and is attributed to her taxable earnings,” says DavidAblett, director of tax and retirement planning with Investors Group inWinnipeg. For example, if $20,000 is withdrawn from a RRIF, up to $10,000 canbe allocated to a spouse for tax purposes. Federal and provincial pensionincome tax
credits may also be available.
Electing to use a spouse’s age to calculate the minimum withdrawal isanother option. This lowers the amount taken out of the account and may alsoreduce taxable income.
Whether a RRIF is opened at 60 or 71, the most important aspect isstructuring a portfolio correctly prior to conversion, says Robin Muir, acertified financial planner and managing partner of Hatch & Muir LLP in Victoria.
A portfolio should have between 20% to 30% in cash, GICs or short termbonds that can be drawn from while leaving growth investments intact, he says.This should be phased-in before converting to a RRIF, allowing a cushion sothat equities can be sold by choice rather than by necessity to replenish thecash flow pool for annual withdrawals.
After death, what happens to an RRIF depends on whether or not abeneficiary has been named. Naming a beneficiary ensures that the RRIF isexcluded from the calculation of probate fees on an estate.
If a spouse is named, they can automatically start receiving payments fromthe RRIF. A financially dependent child or grandchild can purchase a termannuity or transfer it to their RRSP.
“When seeking RRIF advice, be sure to get it from someone who understandsdrawing down wealth not just accumulating it,” Mr. Muir says, “so you don’t runout of money before you run out of life.”

RRSP Season… or is it?

Posted on February 18, 2013 at 11:49 AM Comments comments (593)
Wow! February already and the RRSP purchase deadline for 2013 is fast approaching. This deadline for those under 69 is March 1 this year, 60 days after the end of the tax year.
RRSPs can save you money by deferring the taxes that would be owed on the amount of RRSP purchased. Simply put if you are in a 40% tax bracket, a $1000 RRSP purchase will save you $400 in taxes for that tax year. Purchased before February 29, the tax savings can be used in the previous tax year. There are other considerations depending on the individual or family circumstances, but overall that’s the drift.
Most of us are divided into "Working Guy” (or Gal) who trudges off to work each day, “Family Guy” who deals with life’s little emergencies, and occasionally “Tax Savings Guy”. Now Tax Savings Guy usually appears for only one week a year, scrambling at the last minute to squeeze what little tax advantages he can find to ease the cost of living and maybe even save a little something for retirement.
Many will tell Tax Savings Guy that this is the time to buy RRSPs. Buy Now…Save Taxes…Maximize Your Tax Return!! In fact this is reinforced at every bank and credit union. They are busy right now advertising special rates for RRSPs or even RRSP loans. Last Chance to Save! Borrow Money to Save Money! Rates so low it’s almost FREE!!
So how about that? Is it RRSP Season? Should we buy now to save on last year’s taxes? I say no. Purchasing now can actually HURT you financially.
Now, you should always buy RRSPs if it is beneficial to your individual tax situation, such as in a higher tax bracket. How much to purchase would be determined by where your income is within that bracket and by the eligible RRSP amount listed on the bottom of last year Notice of Assessment from the Canada Revenue Agency (CRA). However, it is not always wise to borrow now and pay all year for last year’s loan. Tax Savings Guy would be better off ignoring last year and focusing on being around more this year. The money that would have been set aside to pay off last year’s loan could instead purchase NEWRRSPs for the present tax year.
Knowing your RRSP eligible room, Tax Savings Guy can arrange an automatic withdraw from each paycheque to make RRSP purchases. This way he is ahead of the game. He is purchasing this year’s RRSP as well as value averaging the purchase of any mutual fund, stock, or GIC that is being purchased. But the big score is he is not paying interest. As well, the additional tax refund can be used for anything and not just to repay a RRSP loan such as paying down mortgage or credit card debt. Granted he could give the money to Family Guy who never seems to have enough. The point is money is saved, not borrowed. Interest is made, not paid.
So forget about the hype. Remember… RRSP Season is All Year Long!! Retirement Guy will thank you for it.

The Nuts and Bolts of RRSPs

Posted on February 18, 2013 at 11:47 AM Comments comments (10680)
While many Canadians are stressed about RRSPs and the looming contribution deadline, Jason Casagrande feels excitement. The 34-year-old Torontonian, however, has been investing since he was 15, and works as a certified financial planner with BMO’s investment and retirement planning department. “Seeing the accounts grow is my motivation,” Mr. Casagrande says.
The rest of us hear the term RRSP — maybe even just the first two letters — and get glassy-eyed, or even wide-eyed (60% of respondents of a recent BMO poll reported suffering from anxiety about gathering retirement savings).
So how do you get people excited about saving for the future? First, arm them with information. To help, Mr. Casagrande, and other financial experts, have provided answers to their most frequently asked questions.
Q What are the rates on RRSPs?
A “There seems to be a misconception with what RRSPs actually are. People think an RRSP is an investment,” says Scott Plaskett, a certified financial planner and founder of Ironshield Planning. “It’s not an investment, it’s simply an account that you put investments into that have certain tax benefits associated with it.”
Q OK, how much can I contribute to my RRSP?
A Revenue Canada puts limits on the amount of money you can contribute to registered savings programs every year. You’re able to contribute up to 18% of your previous year’s income to your RRSP, up to a maximum of $22,970 for 2012. The tax benefit? You are then taxed on your income, minus the RRSP contribution. (Revenue Canada mails you a notice of assessment, which tells you your contribution limit.)

Q What happens if I get too excited and over contribute?
A Revenue Canada will penalize you 1% a month on the over-contributed amount; you can then do a redemption from your RRSP to hit your limit.
Q Should everyone jump on the RRSP train?
A Not everyone should be putting money into an RRSP, Mr. Plaskett says. First determine whether it is the best wealth-accumulation vehicle for you. “We have clients who have low taxable income, very little debt and they’re self-employed,” he says. “If you don’t get the immediate tax savings then you’re actually doing a disservice to yourself or to your financial plan by putting money into an RRSP.” In this case, he says, you might consider a tax-free savings account.
Q When should I contribute?
A You have until the first 60 days of 2013 to contribute for the 2012 tax year; the deadline this year is March 1. But the earlier you do, the better — and save regularly. “Get into the practice of investing every week or every month or every time we get a paycheque. The sooner the money goes in, the sooner it’s working for you,” Stuart Gray, regional financial planning consultant at RBC, says. “When you’re looking at investments like mutual funds that may fluctuate in value, you’re taking advantage of dollar-cost averaging….You’re buying into those investments, if you were doing it monthly, 12 times a year, instead of one day sometime in February.”
Q I spent all of my money on Boxing Day. What if I don’t have cash for a contribution?
A If you have not been saving throughout the year for your retirement, you could borrow funds to make the contribution. But if you choose this route, you must ensure that you repay the loan as quickly as possible. Use the tax refund to pay down part of the loan.
“Most people pay it off in six months,” says Mr. Casagrande. “You might pay a couple hundred dollars [in interest], but you’re getting thousands of dollars back on your return and you now have a nest egg that’s thousands of dollars larger.
You have to be OK with the thought of having a short-term liability for a long-term gain.”
You could also make a transfer of eligible capital property to the RRSP but make sure this fits with your tax and investment strategy. (When securities are transferred from a non-registered investment account into an RRSP, the securities are treated as if they had been sold and will trigger any capital gains or losses. The amount of the security is its market value at the time of transfer to an RRSP.)
Q I don’t have an account, how do I get one?
A Contact your bank. Check if they have any incentives. For example, right now BMO will give you 15% of your first month’s contribution to a maximum of $150 if you open an RRSP account with an automatic savings plan.

Q So what’s the right investment choice?
A “Make sure the investments that you’re holding in your RRSP match the objective that you have for that money,” says Mr. Gray. “We’re looking at time horizon and your risk objective. When I’m looking at an RRSP, I’m looking 50 or 20 years out so my risk tolerance may be different than money that I’ll need next year. That means diversifying between the asset classes that are available to you whether that’s cash, fixed income or guaranteed investments, or equity investments.”
Q Do I invest in my RRSP or my TFSA?
A It’s not really an either/or situation. The savings tools complement each other. The benefit of an RRSP is that contributions reduce your taxable income. But you pay taxes on the money when you withdraw it down the road. Also, once you take the money out of your RRSP, you’ve lost the contribution room that you originally used.
With TFSAs, you do not receive a tax deduction. But money grows tax free and you do not pay taxes on it at the time of withdrawal; when you withdraw from your account, you may put that sum back in the following year.
“One of the things I would always look at is, what is the client’s tax rate today?” Mr. Gray says. “If the client is in a high tax bracket, RRSPs are more palatable because they get that tax reduction. Ideally, they’ll probably be in a lower tax bracket in retirement.”
Meanwhile, a younger individual who is just out of school might prefer a TFSA.
“They’re going to get more benefit from using an RRSP as their income increases. People who are younger have different savings goals, whether it’s a down payment for a house, or a car, and they can pull out from a TFSA and have less of a tax burden.”

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RRSP or TFSA? Tuck money away into both if possible, experts say

Posted on February 18, 2013 at 11:45 AM Comments comments (3197)
CALGARY — It’s the battle of the acronyms — RRSP or TFSA?
They’re both savings vehicles that can help with your tax bill, but which one reigns supreme will depend on your own individual situation.
In ideal circumstances there would be no showdown — Canadians would sock money away into both, experts say.
But circumstances aren’t always ideal.
“Maybe it’s a quality of life decision or maybe it’s truly just there is not the availability of income or assets to contribute to both,” said John Tracy, senior vice president of retail, savings and investing at TD Canada Trust.
“Both is a great answer when you can do it.”
An RRSP — a registered retirement savings plan — is, as its name suggests, meant for retirement. Funds can be withdrawn sooner — under the Home Buyer’s and Lifelong Learning plans, for example — but generally this is money that won’t be touched until your golden years.
TFSAs — tax-free savings accounts — are more flexible. They can be used to save for retirement, to be sure. But because that money is easier to access in a TFSA than it would be in an RRSP, it can serve many other purposes.
“It’s starting to pick up a lot more popularity with the younger generation who is not quite geared to thinking about the retirement,” said Cleo Hamel, a senior tax analyst.
“They’re more along the lines of thinking of today and what they have planned in their own life — getting married, buying a home.”
You can find out how much you are allowed to contribute to your RRSP on last year’s notice of assessment from the Canada Revenue Agency — 18% of that year’s income to a maximum of around $23,000. Unused contribution room from previous years gets carried over.
The deadline for making a contribution for the 2012 tax year is March 1, so it’s really the only option Canadians have available now to ease last year’s tax bill — RRSPs give the immediate benefit of a tax deduction.
Because there’s a penalty for withdrawing from an RRSP before retirement, tapping those funds is really a “last resort,” said Tracy. Another deterrent is that once that money is withdrawn, that contribution room is gone for good most of the time.
“In some cases, it makes more sense to borrow money than access your RRSP because the penalty in tax would be so significant,” he said.
From a psychological standpoint, the difficulty in withdrawing from an RRSP can be a good thing for those keen on letting their retirement savings grow.
“I think for real retirement savings, feeling like you’ve locked it in a bit more in RRSPs and leaving it there and letting it compound for a longer period of time can really be quite beneficial,” said Dennis Tew, chief financial officer at Franklin Templeton Investments Corp.
On the other hand, you can take out money from your TFSA any time without being dinged by the tax collector and that contribution room is restored the following year.
The deadline for contributions is the end of the calendar year, so that ship has sailed when it comes to 2012. For 2013, the limit for contributions has moved up from $5,000 to $5,500 to account for inflation. Like with RRSPs, spare contribution room from previous years is available in the future.
Whether it be an RRSP or TFSA, the money contributed can be invested in mutual funds, stocks, bonds and GICs.
Since RRSP funds are taxed upon withdrawal and TFSA contributions are not, it’s also helpful to think about whether or not you foresee yourself being in a higher or lower tax bracket when you use that money than you are today.
Another factor to consider is what effect RRSP funds will have on Old Age Security, the Guaranteed Income Supplement and other government benefits. At times, it might make sense to divert some money into a TFSA.
RRSP or TFSA — whichever one Canadians pick, Tracy said the most important thing is that they do something.
“Create a habit of saving. Start small. Don’t get overwhelmed,” he said.

RRSP pitfalls to avoid

Posted on February 18, 2013 at 11:41 AM Comments comments (3298)
(Special) - While the Registered Retirement Savings Plan (RRSP) is a great vehicle to help Canadians save for their retirement, there are some pitfalls that investors may not knowabout and should try and avoid.
Many people, forexample, confuse their contribution limit with the deduction limit.
The deduction limit isset at 18 per cent of your previous year's earned income, up to a dollar limit,which changes every year. The maximum dollar limit for the 2012 tax year is$22,970, up from $22,450 in 2011, and will rise to $23,820 in 2013. It iscontained in the Notice of Assessment that you get each year from the CanadaRevenue Agency after you have filed your return.
If you have not beencontributing the full amount to your RRSP and have unused contribution room,your contribution limit could be higher than the deduction limit. If, forexample, you have $20,000 of unused contribution room from previous years, youractually contribution limit for 2013 could be $43,820, your 2013 deductionlimit plus your past unused contribution room.
Another pitfall can besaving too much in your RRSP and having too many accounts.
An RRSP of between$700,000 and $2 million, for example, may sound great, but that money will betaxed at some point. A retiree with such a large plan would be in the 46 percent tax bracket and would have their Old Age Security (OAS) clawed back.
Having your financialassets spread over several plans can lead to a disorganized investment strategy,duplication, inappropriate asset allocation and paying more fees than if allinvestments were consolidated in one account.
Waiting to the lastminute to make your contribution is another common pitfall. It can lead tomaking emotional decisions or parking the money for too long on the sidelines.By contributing early or making regular contributions during the year you getthe tax-sheltered returns starting sooner and get the advantages of dollar costaveraging.
Many people may notrealize they have a choice when they can actually claim their RRSPcontribution. You don't have to do it in the same year that you actually makethe contribution.
"If your incomeis below $45,000 one year but you expect it will go up the next year, you canmake the contribution but then wait until the second year to actually claimit," explains Myron Knodel, director of tax and estate planning withInvestors Group. "In this way you would get a greater tax break from yourcontribution because you are claiming it in a year when your income ishigher."
Many people also maybe investing in the wrong things in their RRSP.
The advantage ofinvesting in registered accounts such as RRSPs and Registered Retirement IncomeFunds is that the money is only taxed when the funds are withdrawn. When youtake money out of your RRSP at 71, you are taxed at your marginal rate at thetime, which is usually lower than when you were working full-time.
As a general rule,it's better to invest in fixed income in your RRSP and equities outside of yourRRSP in a non-registered account.
You can claim acapital loss from equities if they are in a non-registered account whereas youcan't if they are in a registered plan. And capital gains made on equities heldin a non-registered account are taxed at only 50 per cent of the individual'smarginal tax rate.
Consequently,non-registered accounts generally should contain equities and dividend payingstocks instead of interest-bearing investments such as Guaranteed InvestCertificates and bonds which should be in your RRSP.
Don't withdraw yourmoney from your RRSP early because it is taxed very heavily and try to takeadvantage of both your RRSP and the Tax Free Savings Account (TFSA).
Although the TFSA wasintroduced five years ago, a recent BMO Bank of Montreal survey found that fewer than half ofCanadians have been making the maximum contribution of $5,000 a year. Themaximum contribution this year is going up to $5,500.
"Look at whatyour tax rate is now and what you expect it to be when you retire," Knodeladvises. "If you expect your marginal rate will go down when you retireit's better to make contributions to your RRSP and take the tax refund andreinvest it. If you are not saving for retirement a TFSA is usually preferableto an RRSP because you can remove money from it tax free but funds removed fromyour RRSP is taxed when removed. "
Talbot Boggs is aToronto-based business communications professional who has worked with nationalnews organizations, magazines and corporations in the finance, retail, manufacturingand other industrial sectors.
Copyright 2013 TalbotBoggs