Tag Archives: RRSPs

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.

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…

What to consider before converting your RRSP to a RRIF

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By David Mortimer

(Sponsored Content)

Congratulations, you’ve retired! After many years of working and saving, the time has finally come for you to travel, spend more time with family, or do any number of activities you may not have had time for when working 40+ hours per week.

One of the first decisions you now need to consider is when to convert your RRSP to a RRIF? Technically, you are required to do so by December 31stof your 71styear, but many retirees find themselves wondering if they should do so early. Here are some things to consider before making the conversion from RRSP to RRIF.

Am I retired for good?

It’s important for people to consider whether they’ve retired for good before converting their RRSP to a RRIF. Remember it may not be so easy to turn back  after making the conversion from RRSP to a RRIF so if you are planning to return to work, even part time, you may find yourself with a tax problem if you’re working and taking an income through your RRIF. The taxes you end up paying could easily wipe out any financial gains you would make from working part time, not to mention it would not allow you the option to continue contributing to your RRSP (once converted to a RRIF), which will further reduce your taxes – providing of course you are under the age of 72!

Thinking you might like to keep busy with a part time job? Consider supplementing your finances with your tax-free savings account and non-registered investments before touching your RRSP. If you draw these out first while still working, there will be fewer tax consequences. You may also be better off taking money from your RRSP on a short-term basis rather than officially converting to a RRIF right away.

When it comes down to it, don’t collapse your RRSP into a RRIF until you’re fully retired, and have considered all your potential income streams and their potential tax consequences.

What income streams are available to you?

When making the decision on when to convert your RRSP to a RRIF, it’s important to look at how you will be funding your retirement. Do you have a workplace pension you will be receiving? What about Old Age Security (OAS) or Canada Pension Plan (CPP)? Keep in mind that your OAS has certain claw-back provisions once your income exceeds a certain threshold. Continue Reading…

5 financial fitness tips to help becoming #RetireReady

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By Jenny Diplock

Special to the Financial Independence Hub

As any personal trainer will tell you, a new fitness routine starts with a personalized plan and a target goal. And to improve performance, you need to train: especially in the off-season. Taking a similar approach to your retirement contribution goals can help you feel confident you’re #RetireReady.

In fact, according to a recent survey from TD, 79 per cent of working Canadians agree that reviewing their retirement contribution goals outside of RSP season is a good idea.

But even with these good intentions, the data shows just 40 per cent of working Canadians contribute regularly to their registered Retirement Savings Plans (RSPs) through pre-authorized contributions, 20 per cent don’t contribute to retirement savings at all, and nearly a third of working Canadians feel stressed out during the February RSP season.

When it comes to saving for retirement, contributing to your RSP once a year is like running a marathon without the right training. Because you’re not in the habit of saving, trying to come up with one large contribution amount just before the annual RSP deadline can be harder than contributing smaller and more manageable amounts throughout the year, potentially putting additional pressure on the rest of your finances.

To help improve your retirement readiness year-round: Continue Reading…

Dear Generation X: Here’s how to fix your Finances

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The number of financial responsibilities facing Generation X – those ages 37 to 52 today – seems overwhelming. Getting married, having kids, and raising a family can be expensive enough. Now factor in building an emergency fund, paying down the mortgage, setting aside money for retirement, saving for your child’s education, and everything else that comes along with improving your finances. It’s a tall order – I’ve been there! In fact, I’m living it.

But let’s skip the scaremongering and over-generalizations and get to some common sense advice.

How do you balance paying off debt, saving, and investing with the everyday costs of supporting a family? Let’s start by setting up a simple plan for each of these categories to ensure that you are on the right financial path. Here’s how to fix Generation X finances:

Treat consumer debt like a financial sin

You can’t move the needle forward financially if you’re constantly spending more than you earn. But when your mortgage payment, car payment(s), daycare costs, groceries, and gas take up your entire available budget then you have no wiggle room to plan for unexpected costs.

Not only that, when the “I deserve this” moments come up and you want to treat yourself or your family to dinner, a movie night, or a vacation you end up going into debt (just this one time) to make ends meet.

Start with a list of everything you currently spend over a period of three months. Where does all your money go? Find a way to slash expenses so that you’re no longer going into debt just to get through the month.

Make it a rule: No new debt this year

Now it’s time to tackle your current debt, whether that’s in the form of a lingering line of credit or (gasp!) a high-interest credit card. If it’s the latter, put all savings and extra spending on hold and throw every extra dollar at that debt until it’s paid off.
Continue Reading…