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The pros and cons of RRSPs: What you need to know

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By Allan Small

Special to the Financial Independence Hub

If there is one thing COVID-19 has not impacted, it’s RRSP season. March 1, 2021 is the deadline for contributing to an RRSP for the 2020 tax year. The question is, should you?

The basics: Anyone who files an income tax return can contribute 18% of earned income to a maximum of $27,230 for the 2020 tax year. If you have an employer-sponsored pension plan, your RRSP contribution limit is reduced by the Pension Adjustment (PA). Unused contribution room can be carried forward to use in the future.

Generally speaking, RRSPs make sense for anyone who wants and can afford to invest for the long term. Here’s why:

Pros

  • Contributions are tax deductible.
  • Earnings grow tax-sheltered within the plan.
  • You can defer tax on investment earnings and contributions to the future. This is particularly useful if you are a high-income earner and your marginal tax rate is likely to be lower in the coming years.
  • RRSPs can hold a wide range of qualified investments. For example, you can hold GICs, savings bonds, Treasury bills, bonds, mutual funds, Exchange Traded Funds (ETFs), equities (both Canadian and foreign), and income trusts in an RRSP.

Deciding what to hold in your RRSP really comes down to the same factors you have to consider when making any type of investment: your comfort level with risk, your investment objectives and your time horizon. For example, if your goal is to grow your wealth over time and market volatility doesn’t keep you up at night, then you may want to consider growth investments such ETFs, mutual funds and stocks. If you want income, then income-generating and interest-paying investments are worth looking into.

All of this said, RRSPs do have their drawbacks.

Cons

  • While you can withdraw funds from an RRSP before you retire, you will have to pay a withholding tax and you also have to report that money as taxable income to the Canada Revenue Agency.
  • The Government of Canada controls the amount of money that must be withdrawn annually once the RRSP matures. When you convert the RRSP to an Registered Retirement Income Fund, which must be done when you turn 71, you are required to withdraw a minimum amount each year starting at age 72 even if you don’t need the money.

RRSPs work best for people who can use a tax deduction and can afford to put money away for the future. Another consideration: Is your income in retirement (and therefore the marginal tax rate you’ll have to pay) going to be equal to or greater than it is during the years you can contribute to an RRSP? If this is the case, you won’t be achieving any tax savings by contributing to an RRSP. However, you could still benefit from deferring tax. The question then becomes, do you pay the income tax now or later? Continue Reading…

MoneySense: 2 articles on how Canadians can play the cryptocurrency mania

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MoneySense.ca has just published two online articles on investing in Bitcoin and other cryptocurrencies. One is by me. Click on highlighted headline for full column: How to invest in Cryptocurrency (without losing your shirt.)

The other is from regular Hub contributor Dale Roberts of Cutthecrapinvesting. His MoneySense piece can be found here: Should you invest in Cryptocurrency?

My piece is the first time I’ve publicly written about crypto, although the Hub has long covered it, both positively and not so positively. Try, for example, this primer published here way back in July 2017.

The MoneySense piece recaps my personal experiments with Bitcoin and Bitcoin funds, as well as Ethereum and Ethereum Funds, going back to the fall of 2020. I sat out the original 2017 boom.

It seems to me that investors should regard this as a new asset class that should probably not exceed a few per cent of a diversified portfolio. Certainly, institutional acceptance of crypto and attention from hedge fund billionaires like Paul Tudor Jones seems to have ignited the new euphoria, buoyed in part over the frustration of minuscule interest rates and inflationary forces unleashed by endless money printing by central banks in the US and the rest of the world.

Based on the recommendation of Profit Unlimited’s Paul Mampilly, my first try was to put several thousand dollars into each of the Grayscale Bitcoin Trust [GBTC/OTC] and Grayscale Ethereum Trust  [ETHE/OTC], which I currently hold in a non-registered account.

I soon realized I wanted to hold these experimental positions in registered portfolios (RRSPs and TFSAs) so that the next time I got a double or triple — if indeed they materialized rather than comparable losses — I could book the gains with no immediate tax consequences. I soon discovered the closed-end funds of Toronto-based 3iQ Digital Asset Management:  first I tried The Bitcoin Fund [QBTC/TSX] andThe Ether Fund [QETH.U/TSX], can be held in registered accounts like RRSPs and TFSAs.

My third experiment was when Mampilly started to recommend his readers move from the Ethereum tracking ETHE to actual native ethereal or ETH (which some call Shitcoin, or poor man’s Bitcoin). He suggested buying actual “native” crypto from places like Coinbase and RobinHood, convenient for his mostly American subscribers but less so for Canadians. Continue Reading…

Banking from home and Canada’s seniors: RBC sees surge in digital & online banking by older clients

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By Rick Lowes,

Vice-President, Retirement Strategy, RBC

(Sponsor content)

As the pandemic took hold in early 2020, many Canadian seniors quickly learned how to bank safely and securely from home. Now that winter is setting in, many seniors who’ve continued to use their branch through the pandemic are likely exploring these options. We’re looking forward to helping more seniors across Canada discover the simplicity of not having to go outside their home to do their banking, while resting assured their bills will be paid correctly and on time.

We’ve already heard from many of our senior clients about how pleased they are to have made the transition to online or mobile banking. An elderly client in Prince George, British Columbia who thought he could only transfer funds out of his eSavings account in person is now very happily doing online banking from home.

A senior in Burlington, Ontario – who wanted to know how he was supposed to pay his bills while the branch across the street was temporarily closed – is now paying all his bills online. And an older client in St. John’s, Newfoundland – who had fears about using a computer – couldn’t believe how easy and secure it was to do online banking, when one of our advisors walked her through the process over the phone. From coast to coast to coast, seniors like these have been engaging with our online platforms, spurred on by the realities of ongoing physical distancing.

To share some statistics of our own around what this new activity looks like, over this past year we’ve seen seniors aged 60+ increase their use of electronic money transfers by 101% and digital payments by 46%. Among seniors aged 70+ who are newer to online banking, mobile banking has quickly become their favoured channel for banking from home.

Seniors have been receiving one-on-one support from our advisors that is helping to make them more comfortable with online banking. As a result, we’ve seen that comfort level translate into empowerment and the ability to make decisions about their finances while banking from the comfort of their homes.

 Responding to Canada’s new Seniors Code

We’ve also responded quickly to ensure we had comprehensive support in place for seniors and for our employees who work with seniors, aligned with the new Code of Conduct for the Delivery of Banking Services to Seniors (“Seniors Code”). This Seniors Code guides banks in their delivery of banking products and services to Canada’s seniors. Continue Reading…

How will you react to the 50% Incorrection?

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

Words are important.  Not only because of what they say, but also what they imply without saying.  The finance business is full of such words and phrases.

Today, we’ll look at one of my (ahem) “favourites” – the word “correction.” Within the field of finance, a correction is when the stock market drops by 10% or more.  A more precise term might be a drop of more than 10%, but less than 20%, because a drop exceeding 20% is no longer a correction, it is a bear market.  Got that?

The finance industry presumes markets always rise

Here’s the thing about industry Bullshift.  The presumed direction, when speaking about the future, is pretty much always up. Every prognostication from everyone who does a prognostication for every asset class under all circumstances is that ‘the market’ (whatever index or asset class is being discussed) will go up this year.  I have literally never seen a major industry player predict a year-over-year drawdown in any asset class: ever.

As people must surely know, most financial predictions are made about the stock market.  The data on the subject is quite clear: markets the world over go down about 3 times every 10 years.   Many prognosticators hedge their predictions by allowing that, of course, a ‘healthy correction’ of about 10% could happen at any time and for almost any reason, including no discernable reason whatsoever.

An ‘Incorrection of Epic Proportions?’

My question to you is about symmetry and consistency.  If a drop of 10% or more is a “correction, it must logically follow that a gain of 10% or more is an “incorrection.” Who decides what is correct or incorrect, anyway?
Continue Reading…

Mix business with pleasure – maximize the benefits of your second home

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By Salvatore Presti

So, you’ve spent decades building up a nest egg to help provide you with a financially stable and comfortable retirement. The unpredictability and risks involved in many kinds of financial investment so you prefer not to base your entire portfolio on the markets. You want something more tangible, with the possibility of steady growth, and that you can leave to your family when you pass away.

If this describes your approach, then investing in a second home makes perfect financial sense.  Property values tend to increase over the long term, so your capital is growing, despite any shocks the financial markets might experience.  Not only that, you’ll have the option of generating rental income as an additional rental stream.  And, if you choose, you can use your second property as a vacation home for yourself and your family, thereby avoiding the costs typically associated with leisure travel, hotels, etc.

Before you proceed, it’s important to be clear about your principal aim in buying a second home.  Financial growth as part of your portfolio?   Opportunity to enjoy a change of scenery? A place where the family can vacation together?

Types of property

First of all, consult an investment /tax advisor to help you understand the financial implications of second home ownership: not only in terms of your initial purchase, but also whether there are tax advantages due to the ongoing costs, and the eventual sale.

If you decide that second homeownership is definitely for you, the next step is to consider the type of property that best suits your needs, and why.

Let’s consider the options, and the pros and cons of each.

Condominiums

Condos have several advantages. They’re more secure than an individual property, maintenance is easier to arrange, and there’s no upkeep of external areas involved.  You’ll be able to show up, move in and enjoy your home, and then lock up and leave without much effort. That’s great if you want a vacation home for yourself and your family.

However, there are also some disadvantages if you want to generate an income. Many management associations have the right to approve or reject potential tenants, so letting may not be so easy and your property may sit empty at times.  There are likely to be many restrictions in the lease – in terms of noise, use of public areas, etc.  These clauses may make it more difficult to use the property for lucrative short-term or Airbnb -style, without violating the terms of your lease.

Individual properties

With an individual property, you’ll have more freedom to rent it out (subject to city regulations), whether on a long- or short-term basis. Whichever type of tenancy you go for, unless you’re living close by and want to be heavily involved with the day-to-day issues as they arise, you’ll likely need to pay for a property management company.  They’ll liaise with your visitors for you, and handle the headaches associated with maintenance and repairs (at a cost of course). This will increase your expenses considerably. Continue Reading…