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The Beginner’s Guide to RRSPs

Posted By Robb Engen | February 1, 2019

More than sixty years after the federal government introduced the Registered Retirement Savings Plan as a vehicle to save for the future, RRSPs still remain one of the cornerstones of retirement planning for Canadians. In fact, as employer pension plans become increasingly rare, the ability to save inside an RRSP over the course of a career can often make or break your retirement.

Here’s a beginner’s guide to RRSPs:

The deadline to make RRSP contributions for the 2018 tax year is March 1st, 2019.

Anyone living in Canada who has earned income can and should file a tax return to start building RRSP contribution room. Canadian taxpayers can contribute to their RRSP until December 31st of the year he or she turns 71.

Contribution room is based on 18 per cent of your earned income from the previous year, up to a maximum contribution limit of $26,230 for the 2018 tax year. Don’t worry if you’re not able to use up your entire RRSP contribution room in a given year: unused contribution room can be carried-forward indefinitely.

Keep an eye on over-contributions, however, as the taxman levies a stiff 1 percent penalty per month for contributions that exceed your deduction limit. The good news is that the government built in a safeguard against possible errors and so you can over-contribute a cumulative lifetime total of $2,000 to your RRSP without incurring a penalty tax.

Find out your RRSP deduction limit on your latest notice of assessment or online using CRA’s My Account service.

You can claim a tax deduction for the amount you contribute to your RRSP each year, which reduces your taxable income. However, just because you made an RRSP contribution doesn’t mean you have to claim the deduction in that tax year. It might make sense to wait until you are in a higher tax bracket to claim the deduction.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers: giving up a guaranteed 25-to-150 per cent return on their contributions.

When your income is higher now than it’s expected to be in retirement: RRSPs are meant to work as a tax-deferral strategy, meaning you get a tax-deduction on your contributions today and your investments grow tax-free until it’s time to withdraw the funds in retirement, a time when you’ll hopefully be taxed at a lower rate. So contributing to your RRSP makes more sense during your high-income working years rather than when you’re just starting out in an entry-level position.

A good rule of thumb: Consider what is going to benefit you the most from a tax perspective.

When you want to take advantage of the Home Buyers’ Plan: First-time homebuyers can withdraw up to $25,000 from their RRSP tax free to put towards a down payment on a home. Would-be buyers can also team up with their spouse or partner to each withdraw $25,000 when they purchase a home together. The withdrawals must be paid back over a period of 15 years; if not, the amount is added to your taxable income for the year.

When should you contribute to an RRSP?

When your employer offers a matching program: Some companies offer to match their employees’ RRSP contributions, often adding between 25 cents and $1.50 for every dollar put into the plan. Sadly, many Canadians fail to take advantage of this “free” gift from their employers, giving up a guaranteed 25-to-150 per cent return on their contributions.

The touchpoint: on being “Packaged” out from the Corporation

Posted By Financial Independence Hub | January 31, 2019

By Kevin Press

Special to the Financial Independence Hub

Since being restructured out of my 14-plus-year, rather comfortable position with a global insurance company, I’ve been asked one question more than any other.

Did you see it coming? The answer in my case is yes. I suspect that’s true for most 50- or 60-somethings who’ve found themselves accepting an invitation to “the touchpoint” from their boss, only to find that it’s been moved from their office to HR at the last moment.

Of course, if you’re anything like me (which is to say that you go to work every day like a Jimmy Stewart character in a Hitchcock movie) then nothing comes as a surprise.

I had two thoughts in quick succession when I received my summons. First, what day is it? Tuesday. Dreaded dead-man-walking Tuesday.

Second, how many documents can I email home between now and zero hour? (Nothing sensitive of course, for the record.)

It’s at this point that things began to turn a bit darkly comic. On my walk to HR, I’m stopped to commiserate with a colleague about the dumb email she just got from her boss. Smile and nod.

Young HR person hands me “The Package”

Turn the corner and my fears are realized. The boss is sitting with a too-young member of the HR team, both sporting the kind of sympathetic look that makes you wish you’d forgotten your glasses. I’m told I’ve “had a good run,” which makes me feel a good deal older than my 52 years. Continue Reading…

Why customizing a personal investment portfolio matters

Posted By Financial Independence Hub | January 30, 2019

By David Miller, CFP, RFP

Special to the Financial Independence Hub

As we say goodbye to a tumultuous 2018 and hello to 2019, it is time for you to review your investment portfolio strategy to ensure it is set up for success in the New Year and for the long-term.

Below are some questions you should ask yourself as you review your investment portfolio:

Is your portfolio suitable for your personal situation?
What is your overall investment strategy and has it changed given the level of volatility you likely have experienced?
Did you receive individualized investment advice from a qualified professional?
- Is that qualified professional a portfolio manager or a salesperson?
Do you or your advisor look at the whole picture when it comes to managing your money?
Are your investments held in a ‘cookie cutter’ investment portfolio?

To ensure your portfolio is suitable, reliable, and catered to your situation, a customized investment portfolio, built by a portfolio manager, may be what you need.

The trend towards a ‘Model Portfolio’

Computers and the use of algorithms have made it easier for banks, institutions and, more recently, Robo-advisors to automate the investment process for the masses. Model portfolios are now common place because of the economies of scale; it’s just cheaper and easier to do. For some people this approach might help save on fees, but for someone with more unique financial planning and investment needs, a cookie-cutter portfolio just doesn’t cut it. You need a portfolio that is customized to your situation.

Why Custom Portfolio Management?

Let’s look at high-income earner John. John has saved faithfully through his big bank over the years, and along with his defined contribution pension/stock plan through his work, he has maximized his RRSP and TFSA. He has no debt and there are very few places he can now allocate his savings without having to worry about the tax implications. He’s in the prime of his earning years and has 10+ years until he’d like to retire.

John is increasingly aware of the high fees his bank is having him pay. He’s seen the advertising on the importance of keeping his fees low *there seems to be a race to the bottom for investment fees¹*. He’s looked at the Robo-options and even at managing his own investments, but he’s not sure and a little stuck. It’s not his expertise.

Here are five big reasons why John may want a tailor-made portfolio: Continue Reading…

My 2019 RRSP playbook

Posted By Adrian Mastracci | January 29, 2019

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

Posted By Jonathan Chevreau | January 27, 2019

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.

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

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…