RRSP’s – What are they & Are they good or bad? Part 4

So let’s now breakdown some of the Goods and Bads of RRSPs, starting with the Goods:

Good facts about RRSPs:

1.    Tax Deduction in the year you contribute

2.    Long Term Growth of Investments

3.    Deferred tax on Growth of Investments

4.    Forced Savings program

Bad facts about RRSPs:

1.    You are eventually taxed

2.    There is a limit on how much you can contribute (may be a good)

3.    Unlike other investment vehicles, you cannot use RRSPs as collateral

4.    You are restricted as to what you can invest in

5.    There are age and income restrictions to RRSPs

6.    Government is in control of the rules

7.    RRSPs are in trust for the government

8.    You cannot receive the tax favorable benefits of Capital Gains and Dividend Income inside of an RRSP

9.    You cannot deduct investment losses on your taxes

10. You cannot deduct interest and carrying charges if you borrow money to invest in an RRSP

This gives you an idea of some of the main Goods and Bads of using RRSPs.  Your bottom line is that you need to plan thoroughly to decide if using RRSPs is for you or not!  Again remember the key if you are using RRSPs is to contribute when your income is high and withdraw when your income is low.

If you are contributing to RRSPs definitely consider using a self directed RRSP as there are many advantages.  Also if you are considering withdrawing from your RRSP, do it in increments of $5,000 or less as the withholding tax is lower.  The key in withdrawing an RRSP is to have a tax plan.  Kustom Design can help you plan a tax effective RRSP withdrawl if this is what you are looking at doing.
There are many more strategies available with and without RRSPs so do come plan with Kustom Design to ensure you maximize your potential and minimize your tax.  Some of the other things you can look at is using your RRSP to give yourself a “Self Directed Mortgage”, where your RRSP holds your mortgage!  Other strategies could be tax shelters and flow through shares.  Come take our Financial Boot Camp to learn more about all of these topics and more.  You can sign up for the Financial Boot Camp on our website at www.kustomdesign.ca/.

RRSP’s – What are they & Are they good or bad? Part 3

RRSP contribution limits are calculated annually on your “earned income”, not passive income, and show up on your Notice of Assessment.  Always know your contribution limit before contributing, because if you over-contribute you will get penalized and have to pay for it!  If you are unsure of your contribution limit you can always contact CRA to get it.

Another interesting fact about RRSPs is that you don’t have to contribute cash.  You can contribute stocks or securities that you already own.  They key is that they must be RRSP eligible investments. 

There is so much to learn about RRSPs…let’s go on.  You can also take a withdrawal from your RRSP to purchase your first home.  This is called the Home Buyer’s Plan.  You are not taxed on this withdrawal, but must pay it back over the next 15 years, or claim it as income over the next 15 years.

There is also something called the Lifelong Learning Plan (LLP), you can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your education. All you have to do is repay at least 10% per year for up to ten years.  Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid within 10 years.

RRSPs are one of the few “after the year” tax planning opportunities that the government allows.  You can contribute to an RRSP for up to 60 days after the end of the calendar year and still have it qualify for that calendar year.  This is an interesting factor as you can contribute to your RRSP in February 2012 and get a tax deduction for 2011.(an example)  Why would the government allow this?  There are a few reasons, such as RRSPs can bring out hidden money into the financial realm which earns income for financial companies, and those financial companies pay tax on the revenue generated.  Also we must keep in mind that RRSPs are actually in trust for the government.  If the government were in a position where they were collapsing financially they could take all the RRSPs as they are in trust essentially for the government if they need them!  …This is of course a scary thought, but it must be considered!