Tag Archives: RRSPs

A Canadian compromise on TFSA contribution room  

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By John De Goey

Special to the Financial Independence Hub

Canadians are notoriously nice consensus seekers.  The old joke might be that they tend to never cross the road because they consistently prefer to be in the middle.  If that’s the case, I’d like to propose a “Canadian” solution to the ongoing debate about how much should be allowed to contribute to their TFSAs annually.

You may recall that the limit is currently set at $5,500 and is likely to go up to $6,000 in a year or two (TFSA contributions are indexed to cumulative inflation and go up in $500 increments when thresholds are passed). You may also recall that for one brief year, the limit was set at $10,000 in keeping with a political promise made by a party that is no longer in power in Ottawa.  The debate, it seems has mostly revolved around the benefit of incremental tax relief for those who might not need it.

You may recall that I have argued that there is an unfair cap put on RRSP contributions because the 18% limit that applies to most people essentially penalizes the small percentage of Canadian income earners who make more than about $145,000 a year.  Similarly, some people like CIBC’s Jamie Golombek have pointed out that many Canadians are opposed to using RRSPs because they will end up paying tax down the road when making RRIF withdrawals.  The point made by Golombek* and others including yours truly is that people should be thinking about the concept of ‘tax bracket arbitrage’ when contributing to government plans. If you’re in a higher tax bracket now as compared to in retirement, contributing to your RRSP makes more sense.  If you’re in a lower bracket, the TFSA makes more sense.  If you think you’ll be in the same bracket, it makes no difference.

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Use your Tax Refund to jumpstart your Savings

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By Jordan Lavin, RateHub.ca

Special to the Financial Independence Hub 

It’s tax season, and if you’re like the majority of Canadians you’ll be getting money back from the government.

That’s right. Out of everyone who files a tax return for the 2017 tax year, 58% are getting a refund and the average amount is $1,765.

That’s not a small amount of money. $1,765 is enough for a nice new TV, a beach getaway, or maybe even a deposit on a new car. If you have a big tax refund coming your way, you might already be dreaming of all the ways you can spend it.

But I want you to think of it another way. Your tax refund is a refund. You’ve paid too much money to the government in taxes over the year, and now they’re returning it to you, without interest. If your tax refund is $1,765, that means you paid more than $147 a month too much in taxes over the year.

It’s your money, not free money!

It’s not free money. It’s your money, that you already earned and were forced to save.

You could take your tax refund and splurge on something fun. But since you’ve already saved that money, why not keep it going and use it to earn money that actually is free?

In fact, you can use a tax refund of $1,765 to generate $724 in interest by depositing it in a high interest savings account, TFSA, or RRSP, and allowing it to grow. That’s more “free money” in your pocket.

Need proof?

Today’s best high interest savings account rate is 2.3%. At that rate, a deposit of $1,765 will earn $41.03 in interest in the first year. After 20 years, it will have earned $1,030 in interest. Once tax is taken out, that means the total earnings on your savings would be $2,489 and change.

Wait, taxes?

Yes, money earned in an ordinary high-interest savings account is taxed at your marginal rate. For example, if you make $50,000 per year and live in Ontario, your marginal tax rate is 29.65%. For every $100 in interest your savings account earns, you will owe $29.65 in income tax.

The advantages of TFSAs

Fortunately, there are some ways to reduce the amount the government takes out of your earnings.

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The Robo RRSP and 11 lame excuses for not maxing your RRSP contribution this year

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Can you trust your retirement to a robot? Illustration by Chloe Cushman/National Post files

With the annual RRSP season coming to a close next week (the RRSP contribution deadline is March 1st), there’s plenty of media coverage to remind investors of this fact. Two this week came from my pen (or electronic equivalent).

Earlier this week, the Financial Post published the following column you can retrieve by clicking on the highlighted text of the headline: Can you Trust your Retirement Savings to a Robot? 

By robot, we are referring of course to so-called Robo-Advisers or automated online investment “solutions” that generally package up various Exchange-traded Funds (ETFs) and handle the purchase, asset allocation and rebalancing at an annual fee that’s generally is far less than what a mutual fund or two might deliver. (that is, usually 0.5% plus underlying ETF MERs, compared to 2% or more for most retail mutual funds sold in Canada.)

The piece begins with a fond nod to a topic I used to write about periodically in the FP in the 1990s, at the height of so-called Mutual Fund Mania. It was then that I would write about a set-it-and-forget it approach we dubbed the Rip Van Winkle portfolio, which was simply two mutual funds (Trimark Income Growth, a balanced fund) and  a global equity fund (Templeton Growth) that in effect did (and still do, I suppose) everything the modern robo advisers do. The difference is that because of ETFs, the robo services are about a quarter of the price of the old “Rip” portfolio.

But speaking of undercutting, and as the piece also notes, both “Rip” and the robo services have been undercut by the three new Vanguard asset allocation ETFs that were announced on February 1st, more of which you can find in the Hub blog I wrote at the time: Gamechanger? As I noted there, the Vanguard ETFs seem to be ideal for TFSAs (especially VGRO, the 80% equities offering) but of course they are also ideally suited for a “Rip” like RRSP core offering: VBAL (60% equities) for the typical balanced investor, VCNS (40% equities) for very conservative investors and perhaps those now in the RRIF stage who are required to make forced annual (and taxable) withdrawals.

Motley Fool Canada: 11 myths equals 11 lame excuses for not maxing your RRSP

Meanwhile, Motley Fool Canada has just released a special report I wrote titled The 11 Most Common RRSP myths.  The report builds on several RRSP myths that CIBC’s Jamie Golombek published earlier this year, which you can find here, and my FP commentary on them here.  The report adds several new myths submitted from veteran advisers like Warren Baldwin.

You can also view this promotional email on the RRSP report by Motley Fool Canada Chief Investment Officer Iain Butler.

Retirement investing advice: here’s what works and what doesn’t

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Retirement investing advice is a subject we’re asked about all the time. And it’s one that we deal with on a practical day-to-day basis with our Successful Investor Wealth Management clients.

If you want to pay less tax on dividends while you’re still working, investing in an RRSP (Registered Retirement Savings Plan) is the way to go. That’s because dividends you receive in an RRSP grow tax free.

Is an RRSP the best savings plan for retirement?

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing.

RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)

When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

 A Registered Retirement Income Fund (RRIF) is a great long-term investing strategy for retirement

Converting your RRSP to an RRIF is clearly one of the best of three alternatives at age 71. Continue Reading…

Here are a million reasons to ignore 5 popular RRSP myths

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A lot of Canadians seem to be harbouring misconceptions about the value of RRSPs (Registered Retirement Savings Plans) but I can give you a million reasons why it’s dangerous to believe the  five popular RRSP myths.  My latest two blogs in the Financial Post this week explain why.

In Thursday’s Post, also published in some regional dailies, I described how young people can easily save a million dollars as long as they start early enough. Click on the highlighted text for the online link: How to build a million-dollar RRSP: it isn’t as hard to get there as you think.

Yes, it’s the old story of disciplined saving year in and year out, and the magic of compounding, all aided by the lure of an upfront tax refund and a multi-decade deferment of taxes. Of course, eventually it will be time to draw an income and pay some tax on the RRIF but that’s a story for another day.

Whether a million is enough is open to debate but with today’s paltry interest rates and rising expectations for long lives, the need for annuities or some form of longevity insurance has become urgent. More on that shortly.

Exploding 5 RRSP myths

This morning, Friday,  the FP also ran a blog by me commenting on tax guru Jamie Golombek’s debunking of five common myths average investors harbour about RRSPs. You can find Golombek’s column here: The 5 biggest RRSP myths Canadians can’t stop repeating.

My take on it and a CIBC poll that accompanied the report, can be found here: Almost 40% of Canadians see ‘no point’ in investing in RRSPs — Here’s why they’re wrong.

In short, Golombek and I agree that the RRSP makes a lot more sense than investing only in taxable (non-registered or “open”) accounts. And while the TFSA is a compelling alternative to RRSPs for young people in low tax brackets, or for low-income seniors counting on living on Old Age Security, for the vast majority of middle- and upper-middle-income private sector workers lacking a Defined Benefit plan, the RRSP remains an essential tool for building wealth.

And as I also point out, if you’re in a high tax bracket, you don’t have to choose between an RRSP and a TFSA: you should maximize both!