Tag Archives: RRSPs

RRSP Strategies for 2018

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“When you retire, think and act as if you were stil working. When you’re still working, think and act a bit as if you were already retired.”
— Author Unknown

First, a few words about my overall approach: “I recommend growing the RRSP wisely and sensibly over the long haul. It delivers very well during the decades of retirement income needs. My 2018 strategies offer vital RRSP planning ideas for everyone.”

RRSPs have grown substantially, many exceeding values of $500,000 to $1,000,000 for a family unit. 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. LIRA values can easily range from $200,000 to $400,000. Although, RRSP deposits cannot be made to a LIRA, the account needs to be invested alongside the rest of the nest egg.

Clear understanding of the RRSP regime is essential to guide the multi-year planning marathon.

RRSPs really fit two camps of investors like a glove: those without employer pension plans and the self-employed.

Some investors still shun RRSP deposits. However, my top reason for pursuing the RRSP continues to be long-term, tax-deferred investment growth. It means no income tax is paid until draws are made from the RRSP. This allows the plan to grow for years, often decades.

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 2017

Your 2017 RRSP limit is 18% of your 2016 “earned income”, to a maximum of $26,010. This sum is reduced by your pension adjustment from the 2016 employment slip. The allowable RRSP contribution room includes carry-forwards from previous years.

RRSP deposits made by March 01, 2018 can be deducted in your 2017 income tax filing. There is no reason to wait until the last minute where funds are available. Your 2016 Canada Revenue notice of assessment (NOA) outlines the 2017 RRSP room. Continue Reading…

What to do and not to do when with your IRA

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By Sia Hasan

Special to the Financial Independence Hub

If you have decided to invest in a self directed IRA (Individual Retirement Account: the American equivalent of Canada’s RRSP), you have taken the first step to enjoying a better financial future and to preparing for peace of mind in retirement. However, simply opening an IRA account is not all that it takes to benefit from this type of retirement account. If you want to maximize the benefits of your IRA fully, follow these helpful tips:

Choose the right type of Retirement Account

There are several types of IRA accounts that you can open, and two of the most common options are a traditional and Roth IRA. There are significant differences between these accounts. By learning more about these differences, you may be able to find the account type that is best for your financial planning efforts.

Both have similar contribution limits, but a Roth IRA uses money that has already been taxed as contributions. When you withdraw the money after you reach age 59 and a half, you can enjoy tax-free distributions. A traditional IRA, on the other hand, uses pre-tax dollars as contributions, and the money is taxed at a later date when you withdraw the funds. Depending on your current tax rate and your projected tax bracket in retirement, you may find one of these options to be far more useful than the other.. For example, if you expect to be in a lower tax bracket in retirement, a traditional IRA may be a better option for you because it minimizes your tax liability.

Maximize your contributions

If you want your account balance to grow at the fastest rate possible, you should make regular contributions into it each year. More than that, you should maximize your contributions annually to fully take advantage of the tax benefits associated with the account. Any additional investment funds that are available can be invested in another tax advantageous account or in a non-investment stock account.

Be aggressive in your younger years

With a self-directed IRA, you are in complete control over how your funds are invested. This means you can choose to take less risk or more risk. While taking more risk may sound unwise, the reality is that riskier investments generally have a higher return. In your younger years when you have decades before retirement, you can more comfortably take these risks with your investments. When risks are intelligent and moderated, you can grow your nest egg substantially in the younger years of your adult life. Then you can comfortably reduce your risk and return later in life without negatively impacting your financial security in retirement. Continue Reading…

Advanced RRSP Strategies (Beyond the Basics)

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RRSPs are a valuable tool for many taxpayers, which is why they are the backbone of many retirement plans. Getting the most out of your RRSP often involves thinking several years ahead, rather than just when the contribution deadline is looming.

Here are five RRSP strategies to get you thinking beyond the basics:

Claiming RRSP deductions

Most of us claim our RRSP deductions in the tax year we make the contribution, but you don’t have to. In fact, you can choose to deduct only a portion or none at all and carry it forward.

If you expect to move into a higher tax bracket next year from say, a big promotion, or the sale of rental property, you should still make your contribution to take advantage of tax-free compounding. But, it may be worth waiting to claim the deduction the next year (or later) when your marginal rate will be higher and you will get a substantially bigger tax refund.

Level out income

Continue Reading…

Why “Topping up to bracket” makes sense if you’re temporarily in a low tax bracket

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My latest column in Wednesday’s Globe & Mail looks at a strategy called “Topping up to Bracket,” which can be useful to anyone who is temporarily in a lower tax bracket.

Click on the highlighted headline to access the online version, assuming you have Globe subscriber privileges or haven’t exceeded the monthly free click quota: A strong tax case for early RRSP withdrawals.

When might you be “temporarily” in a lower tax bracket than usual? This can of course happen when you lose a job or if you’re in your Sixties and transitioning between full employment (typically earning in higher tax brackets) and Semi-Retirement, when it’s tempting to “bask” in lower tax brackets.

Temporary because as Semi-Retirement progresses, you can end up moving back into higher tax brackets: for example, if you start to receive Old Age Security (OAS) at 65, then take Canada Pension Plan (CPP) a few years later, these are both taxable sources of income.

And the big hit can come at the end of the year you turn 71, when RRSPs must be converted to Registered Retirement Income Funds (RRIFs) or else annualized or cashed out. RRIFs entail forced annual withdrawal rates that keep rising between your 70s and your mid 90s.

So that makes “Topping up to Bracket” (a term used in a BMO Wealth Institute paper on the topic, published around 2013) a strategy not to be ignored. In practice it means making sure that in those low-earning years you at least bring into your hands each and every year the roughly $12,000 of untaxed earnings that’s called the Basic Personal Amount (BPA). And as the G&M column explains, it’s also a good idea to at least bring in the dollars that are in the lowest tax bracket (15% federally, 5% in Ontario), or roughly $42,000. There are of course higher tax brackets above that but the law of diminishing returns starts to kick in beyond the $42,000.

Note too that this is a “use it or lose it” proposition. If for example a year went by that you failed even to bring in even that $12,000 income that would not have been taxed, you can’t carry forward the opportunity to benefit from it the following year. You will of course have another opportunity for the BPA that year but it won’t double up because you neglected to earn low- or non-taxed income the previous year. Continue Reading…

Do men and women have different Savings Habits?

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By Danielle Kubes

Special to the Financial Independence Hub

In an online survey about savings habits, financial comparison site Ratehub.ca reports that although Canadian men and women save almost the same amount of money, men have a greater level of confidence in their financial planning.

Inspired by 2014 Statistics Canada data that says Canadian women have lower financial literacy scores than men and were less likely to consider themselves “financially knowledgeable” (31% of women versus 43% of men), Ratehub.ca set out to discover if there truly is a gender divide. 

The company digitally surveyed a random sample of 1,087 Canadians in November, with respondents self-identifying their gender.

“Our survey revealed that while men and women differ in aspects of their financial planning, at the core, their personal finance goals and concerns are nearly identical,” the report says.

Both genders have similar financial goals

Indeed, both genders report almost the exact same financial goals. At the top of list of priorities is retirement, followed by travel and then having an emergency fund.

Both men and women prefer to save and invest in registered accounts, especially the registered retirement savings plan (RRSP) and tax-free savings account (TFSA). What they choose to invest in within these accounts — guaranteed income certificates (GICs), exchange traded funds (ETFs), stocks, or other products — is unknown.

Yet men and women diverge most in how confident they are that they’ll have enough money to retire: less than half of women, 41%, say they’re confident compared to over half of men surveyed, at 56%.

Odd, because both genders save almost the same amount of their salaries, with women saving 26% and men 29%.

The gap could potentially be explained in how able they are to grow those savings through investing. Eighty-five per cent of men invest their money, while only 76% of women do.

Of those that do invest, less women than men self-manage their investments, potentially indicating another worrisome lack of confidence in their financial knowledge.

This is supported by the original Statistics Canada data, which found women were less likely to state they “know enough about investments to choose the right ones that are suitable for their circumstances.”

Confidence doesn’t mean financial knowledge

But does confidence translate to actual financial knowledge? Apparently not. When Statistics Canada quizzed Canadians who rated themselves financially literate, one in every three women failed, while one in every four men failed. Continue Reading…