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My 2019 RRSP playbook

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This time of year I propose that you focus on “Strategies 360°.” That is, your big picture. For example, review what is best for you. Follow your total investment plan. It’s too easy to be preoccupied only with RRSPs.

First, a few highlights about my overall approach:

  • I recommend growing the RRSP wisely and sensibly over the long haul.
  • Refrain from placing portfolio performance in top spot among your priorities.
  • Never lose sight that your primary mission is to manage investment risks.
  • RRSPs can deliver steady income streams during your years of retirement.

RRSPs have grown substantially, many approaching ballpark values of $1,000,000 to $2,000,000 per family. Also consider that various investors own the RRSP’s financial cousin, a flavour of the Locked-In Retirement Account (LIRA). Such a plan is typically created when the commuted value of an employer pension is transferred to a locked-in account, resembling an RRSP.

Today’s LIRA values can easily range from $300,000 to $500,000. While RRSP deposits cannot be made to a LIRA, the account needs to be invested alongside the rest of the nest egg.

Understanding RRSPs is essential to the multi-year planning marathon. RRSPs really fit two camps of investors like a glove: those without employer pension plans and the self-employed.

Stay focused on how the RRSP fits into your total game plan. The power of tax-deferred compounding really delivers. Keep your RRSP mission simple and treat it as a building block. Take every step that improves the money outlasting the family requirements.

I summarize the vital RRSP planning areas:

1.) Closing 2018

Your 2018 RRSP limit is 18% of your 2017 “earned income”, to a maximum of $26,230. This sum is reduced by your pension adjustment from the 2017 employment slip. The allowable RRSP contribution room includes carry-forwards from previous years.

RRSP deposits made by March 01, 2019 can be deducted in your 2018 income tax filing. There is no reason to wait until the last minute where funds are available. Your 2017 Canada Revenue notice of assessment (NOA) outlines the 2018 RRSP room.

My table illustrates the progression of annual RRSP limits:

Tax Year RRSP Limit Earned Income Required*
2018 $26,230 $145,700 in 2017
2019 $26,500 $147,200 in 2018
2020 $27,230 $151,300 in 2019

  *   Figures rounded

2.) Sensible strategies

I can’t emphasize enough to always treat the RRSP as an integral part of the total game plan, not in isolation. Become familiar with how the RRSP fits the family objectives before designing the personal plan. A retirement projection is a great starting tool. It estimates saving capacity injections, necessary capital and investment returns for the family.

RRSP deposits don’t have to be made every year. Unused RRSP room can be carried forward until funds are available. RRSP deposits can be made in cash or “in kind.” You can also make an allowable RRSP deposit and elect to deduct part or all in a future year. Ensure that all beneficiaries are named.

Borrowing funds to catch up on RRSP deposits has saving capacity implications. Ideally, keep loan repayment to one year and apply the tax refund to it. Especially, when contemplating an RRSP loan for multiple years. Note that RRSP loan interest is not deductible.

3.) Spousal RRSP

RRSP deposits can be made to your account, the spousal, or combination of both. A family can also make all deposits to one spouse and later switch to the other. Spousal RRSPs play a key role in equalizing a family’s retirement income. Particularly, in cases where one spouse will be in a low, or lower, tax bracket during the family’s retirement.

The contributor deducts the spousal RRSP deposit while the recipient owns the investments. Spousal deposits are not limited to the 50% rule for pension income splitting. A top family goal is to achieve similar taxation for each spouse during retirement. Splitting of income that qualifies for the $2,000 pension credit also helps.

4.) RRSP investing

Begin by coordinating your RRSP investing approach with the total portfolio. One RRSP account per individual, plus a spousal where applicable, should suffice for most cases. Be aware of plan fees if you own more than one account.

Never place tax provisions ahead of sensible investment strategies. If investments don’t make sense without tax enhancements, look elsewhere. Investment income earned in RRSP accounts is tax-deferred until withdrawn. All funds received from an RRSP are fully taxable, like salary.

“Location” of investments in your accounts is important. For example, stocks may be better owned outside RRSPs. There is no favourable tax treatment of Canadian dividends, gains or losses in RRSPs. Further, the dividend tax credit is lost as it cannot be used in RRSPs.

Where possible, interest bearing investments may be better held in RRSPs. Be fully aware of the risks incurred inside the RRSP. Personal capital losses cannot be offset against gains in RRSPs.

5.) Planning 2019 and beyond

RRSP room for any year is calculated based on remuneration from the previous year. Your 2018 Notice of Adjustment (NOA) will summarize 2019 RRSP room.

Send form T1213 to CRA to reduce payroll taxes after your 2019 RRSP deposit is made.  Business owners and self-employed are wise to start planning their 2019 “earned income”. Arranging 2019 remuneration of $151,300 generates 2020 RRSP limit of $27,230.

Making RRSP deposits early in the year achieves higher investment growth. If you turn 65 in 2019, you may benefit converting some of your RRSP to a RRIF before December 31. This takes advantage of the pension income tax credit, and perhaps pension splitting with your spouse.

6.) RRSP conversion

Those turning age 71 during 2019 must convert the RRSP by December 31, likely to a RRIF. Hence, begin planning RRSP conversion early in the year. Choices include the RRIF, annuities and cashing the RRSP. The RRIF is most popular because it provides considerable flexibility. RRSP conversions require deposits be made by December 31, unless there is a younger spouse.

Annuities are not flexible, while the tax hit on cashing RRSPs has no appeal. Investors may already own annuities via CPP, OAS, Social Security and employer pensions. RRSP draws can be made until age 71. RRSPs can also be converted in part or in full before age 71.

7.) Individual Pension Plan (IPP)

Companies may explore the value of pursuing an Individual Pension Plan (IPP) versus RRSP provisions. While the rules are more involved, the benefit of IPPs may be worth the extra efforts. You are more likely to require the services of a professional who works with these plans.

8.) Lifelong Learning Plan (LLP)

The Lifelong Learning Plan (LLP) allows withdrawal up to $10,000 in a calendar year from your RRSP to finance full-time training or education for you or your spouse or common-law partner. You cannot draw more than $20,000 in total. Several conditions must be met.

9.) Home Buyer’s Plan (HBP)

The Home Buyers’ Plan (HBP) allows withdrawal up to $25,000 in a calendar year from your RRSP to buy or build a qualifying home for yourself or a related person with a disability. The maximum draw for a couple is $50,000. There are also several conditions to qualify.

10.) Lower-income earners

Lower-income earners may enjoy more benefit by using a TFSA and postponing RRSP deposits to higher income years. Unused room is carried forward for both the TFSA and RRSP. In addition, both plans can serve as the emergency fund, although RRSP draws are taxable.

Wrapping up

RRSP strategies are vital cornerstones of the retirement puzzle. Treat yours with special care, especially if you’re near or in retirement. For me, the venerable RRSP is not to be overlooked. I favour blending RRSP strategies with the RRIF, TFSA and cash accounts. Total family planning is the most beneficial course of action.

Think ahead to where you are headed. Devote ample time emphasizing “Strategies 360°.” Then design and deploy your action plan. Always pursue your best interests. Ensure that all your beneficiary designations, especially the spouse, are up to date for the investment accounts. This journey is for the long run.

My RRSP playbook paves the way. The assortment of strategies offer vital RRSP planning ideas for everyone.

Adrian Mastracci, Discretionary Portfolio Manager, B.E.E., MBA started in the investment and financial advisory profession in 1972. He is currently a portfolio manager with Vancouver-based Lycos Asset Management Inc. He graduated with the Bachelor of Electrical Engineering from General Motors Institute in 1971, then attended the University of British Columbia, graduating with the MBA in 1972.

Retired Money: Whether you’re a stock or a bond may determine when to take CPP/OAS

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When to take CPP/OAS? My latest MoneySense Retired Money column passes on a fresh perspective on the old topic of whether you should take CPP or OAS early or late. You can find the full piece by clicking on the highlighted text here: Why aggressive stock investors should consider taking CPP early.

One of the main sources cited in the piece is fee-for-service financial planner Ed Rempel, who has contributed guest blogs to the Hub in the past. See for example Should I take CPP early? Some Real Life Examples or Delay CPP and OAS till 70? Some case studies.

Ed Rempel

When he recently turned 60, Rempel opted himself to take CPP himself because of course he considers himself primarily a “stock” when it comes to investing (using the concept from Moshe Milevsky’s book, Are you a stock or a bond?). He figures he can get good enough returns by investing the early CPP benefits that he will more than make up for the higher payouts CPP makes available for waiting till 65 or 70. Same with OAS, which he figures even balanced investors should take as soon as it’s on offer at age 65.

The corollary of this is that if you consider yourself primarily a fixed-income investor, then you should probably take CPP and perhaps OAS too closer to age 70. Compared to taking CPP at 65, taking it at 70 results in 42% more payments, while OAS is sweeter by 36% by delaying the full five years.

The MoneySense piece also quotes retired financial advisor Warren Baldwin, who chose to take CPP himself by age 66. Like Rempel and most financial advisors, Baldwin has a healthy exposure to equities. But he also cites a couple of other reasons for his decision. Baldwin, (formerly with T. E. Wealth), figures the value of the CPP fund to pay you the pension at age 65 is at least $250,000: more if you factor in its inflation indexing. The latter is an important consideration, especially for those (like Yours Truly), whose Defined Benefit pensions are not indexed to inflation.

Baldwin took his own CPP at 66, a year after his final year of full-time employment income. He did so “mainly for the cash flow and portfolio maintenance.”  But Baldwin has other reasons too. “I do not want to leave the CPP too long into the future in case the government changes the terms on it or the rate of income tax might rise … Look at how many changes they have made in the last 20 years.”

If a retiree’s marginal tax bracket jumped from 35% to 45%, Baldwin says deferred CPP would face a heavier tax load, while if benefits are taken earlier they would be taxed at more modest rates. And if retirees also have significant sums accumulated in RRSPs and RRIFs, the extra income might push up their Marginal Tax Bracket.

CPP survivor benefits also need to be considered

Warren Baldwin

Finally, Baldwin considers the “estate value” of CPP. “If two spouses have the maximum CPP and one dies, the survivor will not get much from the ‘survivor-ship’ aspect of CPP … So, if the ‘value’ of the CPP at 65 is in the range of $300,000, then if you die before you collect, there is quite a loss. Continue Reading…

How does Real Estate ROI compare to other investments?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

If you ask a long-term homeowner whether they feel their home purchase has turned out to be a worthy investment, chances are they’ll say it was; real estate continues to be considered a safe and effective way to grow your money, according to 68% of homeowners who’ve owned a home for 10 years or longer, according to data collected by Zoocasa.

However, the Canadian housing market is coming off of an admittedly quieter year, with steep declines in sales activity recorded in some of the nation’s largest markets: The Greater Toronto Area, Greater Vancouver, and Calgary have all seen the number of homes changing hands plunge by double digit percentages, mainly due to the impact of tougher federal mortgage rules.

That has subsequently trickled down into home values, with the west coast markets posting year-over-year price declines, while the GTA experienced only moderate, single-digit growth.

So, does the old adage of real estate being among the wisest of investments still hold true? To find out, Zoocasa.com compared average year-over-year price performance to that of three popular investments:

  • The S&P / TSX Composite Index (-11.6%)
  • The S&P Canada Aggregate Bond Index (+1.5% y-o-y)
  • And a high-interest savings account (+1.1%)

Let’s take a look at how real estate price gains (or lack thereof) compared to the returns on these investments in the adjacent infographic.

GTA only market to outpace investment comparison

The GTA (Toronto) housing market ended the year on a positive note, posting an increase of 2.1% for the average home price of $750,180, and the only market to outpace all three investment types.

However, the market lost a considerable bit of steam over the course of the year, unable to hold onto the 9.9% gains achieved at the market peak in June, when prices hit an average of $807,871. Year-over-year December sales clocked in 16% lower than in 2017, which the Toronto Real Estate Board attributes to the federal mortgage stress test. This hurdle, introduced last January, requires borrowers to qualify at a higher rate than their actual contract rate, resulting in a smaller mortgage amount and squeezing affordability in an already expensive market.

“Higher borrowing costs coupled with the new mortgage stress test certainly prompted some households to temporarily move to the sidelines to reassess their housing options,” said TREB President Garry Bhaura, in the board’s December report.

Vancouver values fall from last year

It has been an especially painful year for the Greater Vancouver MLS, as sales have dipped a whopping 31.6% from December 2017: the lowest level of activity since the year 2000. That’s translated into an average price decline of 1.7% to $1,032,400. Continue Reading…

Is an RRSP right for you? Not necessarily

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By Michael Wickware, CMO, Planswell

Special to the Financial Independence Hub

We’re all accustomed to seasonal advertising. Real estate listings in the spring, back to school sales in late summer, holiday sales in the fall, and at the start of every new year, financial industry ads urging you to contribute to your RRSP.

The traditional RRSP season is driven by two main factors:

1.) The rules say you have the first 60 days of each new year to make a contribution that can be applied to your previous years’ tax return.

2.) RRSPs are lucrative for banks and financial advisors, because you’re likely going to keep paying them fees every year from now until retirement.

You might ask, “Isn’t it also driven by the fact that RRSPs are a great way for Canadians to save money?” The billboards, posters, banners and sales pitches certainly seem to suggest as much. I may be a marketing guy, but I work at a financial planning company, so I know it’s not quite that simple.

Unless these advertisers actually know about your personal financial situation, how can they be so sure that an RRSP is the right answer for you? Does absolutely everybody need to contribute to an RRSP, or is there some nuance these Mad Men might be missing?

In my search for answers, I had one major advantage. Planswell has built more than 100,000 financial plans for Canadians. Every plan is based on analyzing dozens of data points about things like goals, income, assets, debts, investments, insurance and more. In other words, I know more than any bank or ad agency about what individual people actually need to get ahead financially.

I asked our engineering team to dig into the data, and what we found definitely challenges the conventional wisdom:

An RRSP was wrong choice 52% of the time!

I didn’t think an RRSP was the best choice every time, but the gap between what the marketing campaigns are saying and what people actually need is a lot wider than I expected. It turns out the annual RRSP ad blitz, backed by all the biggest financial institutions in Canada, has been giving bad advice to half the country.

We decided to dig deeper, and found several reasons why an RRSP may not be the best choice for you. Here are three of the top reasons:

1.) It won’t always maximize your tax savings

An RRSP is not meant to avoid tax completely: just to put it off until you retire. The idea is to reduce your taxable income while you’re working and in a relatively high tax bracket, then pay the tax when you’re retired and in a lower tax bracket. But if you’re already in a low tax bracket, this strategy doesn’t work. And, if you’re early in your career and expect to be in a higher tax bracket in the future, you might be better off letting your RRSP contribution room accumulate until you can use it for a bigger benefit.

2.) You have shorter-term priorities

An RRSP is a long-term retirement investment. You don’t want to be paying fees and taxes and losing contribution room by taking money out early. That means you should make sure that your short-term needs are covered first. For example, if you don’t already have an emergency fund set aside or if you’re planning to buy a home or make a major purchase within the next few years, you may not want to lock your savings away in an RRSP now.

3.) You could miss out on bigger opportunities

Let’s assume an RRSP makes sense from a tax point of view and that you have your short-term needs covered. You’re good to go, right? Not necessarily. Continue Reading…

The multi-generational shift in the workplace

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Joseph De Dominicis

Special to the Financial Independence Hub

While there are a number of interesting workplace trends expected in 2019, there is one main theme leading employers will be focused on: adapting to a generational shift in the workplace. When it comes to their Human Resources (HR) programs, employers will need to focus on providing employees with a consumer-grade user experience at work, and using data and technology to provide integrated, personalized and flexible pension, benefit and wellness programs.

Millennials largest generation in workplace since 2015

The workforce and employee needs continue to change. Since 2015, millennials have outpaced baby boomers as the largest generation in the Canadian workforce, with the millennial mindset now defining corporate culture[1]; generation Z entered the workforce[2], placing new demands on employers as they look to adapt to changing motivations; and with Canada’s aging population, those leaving the labour force outnumber those about to join[3].

In 2019 and going forward, employers need to evolve their programs to fit the new archetype of an employee.

At a conference I attended recently, one of the speakers used the example of a day in the life of an individual to demonstrate how technology is influencing almost every part of their daily routine. This is the experience for most working Canadians; however, there is an evident disconnect upon entering the office.

Need to integrate apps & technology

For example, an employee may wake up and check their Apple watch and ask Siri or Alexa to play the weather report. While taking an Uber to work, the employee orders coffee from the Starbucks app, which is ready for pick-up on the way to the office. The disconnect then happens when that employee arrives at work; programs are not integrated, need to be accessed across a number of systems, are not technology friendly and the information being received is generic across all employees.

When it comes to program development, today’s employees are looking for programs that are delivered to them in the same way they receive information from the platforms and services they interact with in their personal lives – integrated onto one mobile platform with tools and content in one place, and recommendations tailored to their personal interests.

Developing flexible and personalized programs has become especially important today as the workplace is made up of four generations. Organizations have learned that a single approach will not work for all generations; programs need to be developed with flexibility in mind, allowing an employee to customize their plan based on their stage of life: allocating dollars towards health, wellness and saving programs best suited for their specific situation (e.g., paying off student debt versus planning for retirement).

One approach won’t work for four generations

To develop these plans, employers should look to data and technology. Advanced technology, such as artificial intelligence and predictive analytics, will provide employers with the opportunity to customize programs for individuals at their unique life stages. Continue Reading…