Tag Archives: RRSPs

Retired Money: Can an RRSP or a RRIF ever be “too large?”

Posted By Jonathan Chevreau | December 9, 2019

My latest MoneySense Retired Money column looks at a problem some think is a nice one for retirees to have: can an RRSP — and ultimately a RRIF — ever become too large? You can find the full column by clicking on the adjacent highlighted headline: How large an RRSP is too large for Retirement?

This is a surprisingly controversial topic. Some financial advisors advocate “melting down” RRSPs in the interim period between full employment and the end of one’s 71st year, when RRIFs are typically slated to begin their annual (and taxable) minimum withdrawals. Usually, RRSP meltdowns occur in your 60s: I began to do so personally a few years ago, albeit within the confines of a very conservative approach to the 4% Rule.

As the piece points out, tax does start to become problematic upon the death of the first member of a senior couple. At that point, a couple no longer has the advantage of having two sets of income streams taxed in two sets of hands: ideally in lower tax brackets.

True, the death of the first spouse may not be a huge tax problem, since the proceeds of RRSPs and RRIFs pass tax-free to the survivor, assuming proper beneficiary designations. But that does result in a far larger RRIF in the hands of the survivor, which means much of the rising annual taxable RRIF withdrawals may start to occur in the higher tax brackets. And of course if both members of a couple die with a huge combined RRIF, their heirs may share half the estate with the Canada Revenue Agency.

For many seniors, the main reason to start drawing down early on an RRSP is to avoid or minimize clawbacks of Old Age Security (OAS) benefits, which begin for most at age 65. One guideline is any RRSP or RRIF that exceeds the $77,580 (in 2019) threshold where OAS benefits begin to get clawed back. Of course you also need to consider your other income sources, including employer pensions, CPP and non-registered income.

“A nice problem to have.”

But the MoneySense column also introduces the counterargument nicely articulated by Adrian Mastracci, fiduciary portfolio manager with Vancouver-based Lycos Asset Management. Mastracci, who is also a blogger and occasional contributor to the Hub, is fond of saying to clients “A too-large RRSP is a nice problem to have!”

Retirement can last a long time: from 65 to the mid 90s can be three decades: a long time for portfolios to keep delivering. A larger RRIF down the road gives retirees more financial options, given the ravages of inflation, rising life expectancies, possible losses in bear markets, low-return environments and rising healthcare costs in one’s twilight years. These factors are beyond investors’ control, in which case Mastracci quips, “So much for the too-big RRSP.”

Tax hacks: Top 5 tax filing tips to get the most out of this tax season

Posted By Financial Independence Hub | March 11, 2019

By Clayton Brown (Sponsor Content)

Are you leaving money on the table when it comes time to file your taxes? Lots of people do. They don’t bother applying for grants. They leave that ratty pile of expense receipts in the drawer (where they left it last year, too). And they don’t take full advantage of the deductions to which they are entitled.

Let’s get your taxes done right and get the biggest possible tax refund. Here are some tips about pitfalls to avoid, and easy things you can do to make that happen.

Tip 1. Don’t forget to deduct your deductions!

Remember, that tax refund you want isn’t a freebie from the government. It’s your money! They’re just holding it for you. So get it back, by claiming allowable deductions!

Hold on a second. What’s a deduction? It’s an amount you can deduct from your taxable income, thereby paying tax on a lower income.

We’ve noted a few common deductions here to save you some time.

RRSP contributions. You’ll need all of your RRSP slips … right? Actually, not so much! All you need is the dollar amount. Look at the transaction history for your RRSP contributions (which might just be a few lump sum contributions, or from an automatic savings plan) and add up all the contributions you’ve made. It’s a good idea to hang on to the receipts in case you’re audited but you don’t actually need them!

(You should have received them by now: see the timeline of forms below). Lower your taxable income by contributing to your retirement savings.)

Your annual contribution is limited to 18% of your previous tax year’s earned income, plus any unused carry forward room from previous years.

Child care costs. Did you pay someone else to look after your little ones while you went off to work or advanced your education?

The government lets you deduct up to $8,000 per child, for kids under 7. You can deduct up to $5,000 per child for those aged 7 to 16 (just guessing, but maybe there’s a government ratio in there that accounts for cuteness, which declines precipitously after age 6). For disabled or dependent children of any age, the maximum claim is $11,000.

Tip 2. Don’t forget to claim your credits!

A credit is an expense you can claim to reduce your taxes payable. It’s not the same as a deduction, which comes off the top of your income. But a credit is not a 1-to-1 deduction. A $500 credit is not the same as $500 off your tax bill. Check out this list of all available deductions and credits.

One example: interest paid on student loans. This is a pretty sweet deal. You can claim any interest on your student loans as a non-refundable credit. For student loans, the tax credit (federal and provincial) is calculated by multiplying the lowest federal/provincial/territorial tax rate by the amount of the loan interest.

Medical credits are another one that people forget about. You can apply credits to certain medical expenses. Charitable donations are also popular credits.

Credits can be non-refundable or refundable. A refundable tax credit means you’ll get the value for that credit, even if the tax bill is zero. But a non-refundable tax credit will only reduce your tax bill to zero.

Tip 3. Don’t file your taxes before you have all of the information you need

This is a super-common mistake. But filing too early could cost you extra time and money later, if you need to file all over again. Better to wait a bit and do it right the first time. Continue Reading…

Are current beliefs about RRSPs costing Canadians money in the long term?

Posted By Financial Independence Hub | February 26, 2019

By Edward Kholodenko

Special to the Financial Independence Hub

A recent study we conducted with Leger (www.leger360.com) asking what Canadians wanted in relation to their RRSP investments unearthed some compelling findings demonstrating that many Canadians have misconceptions that could be costing them money, especially in the long term.

Our research confirmed 78 per cent would be willing to switch to a lower-fee RRSP investment, if the lower fees could ensure a superior rate of return. When we asked if they were able to move their RRSP easily, which factors would be most important, 66 per cent once again said they would move accounts for lower fees and better returns.

In addition to lower fees and higher returns, 31 per cent of people we talked to identified the ability to easily manage their RRSPs and make contributions online as a factor to consider in a switch (highest in those between the ages of 25 – 44 years), speaking perhaps to the rising appeal of newer fintech companies who offer the ability to do everything online.

When asked for other reasons they might consider switching their RRSPs, respondents cited frustrations including feeling like they’re being upsold (28 per cent), having to book an appointment and visit their financial institution in person (27 per cent) and not knowing what their RRSP is invested in (26 per cent).

This strongly suggests Canadians are far from content with their current RRSP contribution process and provider and would be willing to switch; however, there are misconceptions that are holding people back. Most interesting — only 50 per cent believe their RRSPs can easily be transferred between financial institutions.

Common misconceptions

Why? Common misconceptions included high transfer fees (32 per cent), incurring a tax penalty (24 per cent) and even the fear of an uncomfortable conversation with their current advisor or financial institution (16 per cent). While only 50 per cent of Canadians told us that they believe their RRSP can be easily moved between financial institutions, the reality is that RRSPs are easy to transfer. There are no tax penalties incurred when an account is transferred and furthermore, most institutions would cover the cost of any transfer fee that may be charged and by consolidating your RRSPs at an institution with lower fees, you may reach your retirement goals faster. Continue Reading…

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.

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.