Tag Archives: RRSP

Burning questions Retirees face

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Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.

But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:

Should I pay off my mortgage?

The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment.

It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use the freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.

Which accounts to tap first for retirement income?

Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).

That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.

Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.

This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP: benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.

Should I switch to an income-oriented investment strategy?

The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.

Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.

VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma.

RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.

That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.

Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.

This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.

By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.

When to take CPP and OAS?

I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle. Continue Reading…

Money, health, and family top worries in COVID-influenced RRSP season

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By Scarlett Swain

Special to the Financial Independence Hub

As Canadians turn their attention to their investments during this COVID-influenced RRSP season, an annual online study conducted for Questrade by Leger (www.leger360.com) last month unveiled some compelling findings regarding trends and changes Canadians are likely to make when investing.

As part of our ongoing commitment to improving the financial security of Canadians, we set out to learn about what issues are currently top of mind, how they might impact investing, and what we can do to help investors on their journey to financial security. To no surprise, most respondents chose money, health, and family as their top three worries. We also saw some interesting behavioural trends to note.

Despite the pandemic, our research showed that Canadians continue to be very committed to making contributions to their retirement savings, while evidence suggests investors are placing importance on ensuring their investments go farther.

Most will contribute as much or more this year

A majority (69%) of respondents with an existing RRSP plan to contribute the same amount as last year (or more) to their RRSP this year, showing an unwavering commitment to their retirement. The number is even higher amongst those with a TFSA, with 85% planning to contribute more or the same amount to their TFSA. Half (50%) said given the impact and uncertainty during this pandemic, they are more likely to invest for the long term or for retirement, while 44% are actively seeking lower fee options this year, and 39% are investing more this year to get better returns. Continue Reading…

RRSP playbook for 2021 planning

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Overview
Situation: Investors have plenty of questions about benefits of RRSPs.

My View: RRSPs provide significant value to retirement game plans.

Solution: Master how RRSPs deliver steady, sensible accumulations.

This is the time of year when I propose that you focus on “Planning Strategies 360°.” That is, your big picture. For example, review what is best for your family. Keep close tabs on your total nest egg. It’s too easy to become 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.
  • Your goal is arrange streams of steady income during retirement decades.

RRSPs have grown substantially, many approaching $1,000,000 to $2,000,000 per account holder. Also consider that some investors own the RRSP’s financial cousin, a flavour of the Locked-In Retirement Account (LIRA). This 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 $600,000. Although 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 like a glove for two camps of investors. Those without employer pension plans and the self-employed. Pay attention to how the RRSP fits into your family 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 your family requirements.

I summarize your vital RRSP planning areas:

1.) Closing 2020

Your 2020 RRSP limit is 18% of your 2019 “earned income”, to a maximum of $27,230. This sum is reduced by your “pension adjustment” from the 2019 employment slip. The allowable RRSP contribution room includes carry-forwards from previous years.

RRSP deposits made by March 01, 2021 can be deducted in your 2020 income tax filing. There is no reason to wait until the last minute where funds are available. Your 2019 Canada Revenue notice of assessment (NOA) outlines the 2020 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
2021 $27,830 $154,600 in 2020

 * 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 your game 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.” I suggest sticking to cash. You can also make an allowable RRSP deposit and elect to deduct part or all in a future year. Ensure that all your 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 accounts

RRSP deposits can be made to your account, the spouse, 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 held 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. Continue Reading…

RRSP or TFSA: What’s the best option when saving for the future?

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By Jenny Diplock

Special to the Financial Independence Hub

Personal savings are just that: personal. How much, why and how you save your money should be tailored to you and your personal goals and financial circumstances.

However, many Canadians feel uncertain when it comes to how to invest their money. In fact, a new survey from TD finds many Canadians have mixed views when it comes to the choosing the best method to save for the future. While over half of Canadians surveyed (59 per cent) agree that TFSAs and RRSPs are a crucial part of their savings strategy, one in four (27 per cent) admit they don’t know the differences between the two – whether that’s the contribution limits, withdrawal considerations or impact on taxable income.

If you’re thinking of starting to save – or want to improve your current savings plan – you may want to consider an RRSP, a TFSA, or a combination of the two. Both are great tools for saving that can be used separately or together. But how you use them depends on why you’re saving money, and when and how you want to access it.

For example, if your goal is short-term, like a new vehicle or a home renovation, a TFSA will allow you to grow your money tax-free and you can access it at anytime without penalty. If your goals are long-term, like retirement, an RRSP may be the way to go. People often think that they need to pick one over the other, but that’s not the case. Most people have both short- and long-term goals, so a mix of both TFSAs and RRSPs is often the best choice.

Whether you’re planning for long-term retirement or for a goal in the near term, the important thing is to save your money where it’s going to work best for you. Financial planning doesn’t have to be intimidating and there’s no one size fits all approach when it comes to saving for your future. A financial advisor can work with you to develop a personalized plan that aligns with your time horizon, risk tolerance and personal goals, and will help you feel confident that you’re choosing the best option for your future.

Background info: Survey findings are based on an Ipsos poll conducted between December 17 and 19, 2019, on behalf of TD. A representative sample of 1,500 Canadians aged 18 and over were interviewed online. The poll is accurate to within ±2.9 percentage points.

Jennifer Diplock is Associate Vice-president, Personal Savings and Investing, TD Bank Group, based in Toronto.

 

 

RRSP deadline today: Choosing between a TFSA and an RRSP

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By Micheal Davis, H&R Block Canada

Special to the Financial Independence Hub

The registered retirement savings plan (RRSP) contribution deadline is today!

Many Canadians may be making last-minute contributions before the deadline of midnight March 2nd  in hopes of unlocking a bigger tax return [if investing online; if at a physical branch, you need to act during business hours — editor.]

In fact, a recent survey from H&R Block reveals that 32 per cent of Canadians plan to contribute to an RRSP this year, a six per cent increase from last year where only 26 per cent of Canadians reported their intentions to contribute.

While RRSPs can offer tax advantages to help you reach your savings goals, it’s also important to note that they aren’t the only option available.

RRSPs vs. TFSAs

While RRSPs – a tax-deferred retirement savings vehicle in which contributions are tax deductible – can be a great investment, you do have to pay income taxes when you withdraw money, which makes this option a bit less flexible should a sudden need to access your funds arise.

Another investment tool to consider is the tax-free savings account (TFSA). Because TFSA contributions are made from after-tax income, the TFSA is a simpler tool in that it allows your investments to grow tax-free. And, since taking money out of it has no tax consequences, it can be much more flexible.

How to decide between these two investment options

The main differences between the RRSP and TFSA are their contribution limits, withdrawal restrictions, and how and when you pay taxes. Both are investment vehicles that can shelter taxes on your investments, but depending on your circumstances, one might suit you better than the other. Continue Reading…