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 Amounts withdrawn must be repaid within 10 years.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!

RRSP’s – What are they & Are they good or bad? Part 2

There are many other things to consider in deciding whether or not to do an RRSP.  You must understand the basic concept of an RRSP from a tax perspective.  When you contribute to an RRSP you get a tax deduction, then when you pull the RRSP out you are taxed on that as income.  So therefore, you may not be saving tax when you contribute to an RRSP, but rather deferring tax.  The key to saving tax if you decide to do an RRSP is to contribute when you have high income and pull out the RRSP when your income is low.  You would not want to contribute into an RRSP in a low income year.  Also if you have a plan that will continuously provide high income later in life, then RRSP’s may not be good for you.

Basically there are 2 sides to the RRSP, the tax deduction (which we just discussed) and the investment side.  Once you make the RRSP contribution you can now invest the money from within your RRSP.  You can either have someone that is licensed invest it for you, or you can set it up as Self Directed RRSP and invest it yourself. 

Another thing to understand is that some RRSP’s are locked in and some or not.  This is typically a choice that must be made.  Unless you have a specific purpose for locking in the RRSP, then you are best to go with an RRSP that is not locked in.  If your RRSP is locked in then you will not be able to withdraw it until you are in your elder years (currently 71) and can transition it into a RRIF (Registered Retirement Income Fund) 

Although the majority of people that do RRSPs contribute to their own RRSP, you can also contribute to a spousal RRSP which gives you a tax deduction, but allows your spouse to withdraw it later on.  The other main type of RRSPs is group RRSPs, which are typically contributed to through employment arrangements and are deducted off of paycheques. 

RRSP’s – What are they & Are they good or bad? Part 1

First of all we should start off with what is an RRSP?  The letters RRSP stand for Registered Retirement Savings Plan.  An RRSP is a trust account in Canada that allows you to hold investments in it, earning income tax free until you withdraw the money.  We must understand the concept and not get confused in that an RRSP is not an investment, but instead a way to hold investments. RRSP’ have been around since 1957 and still stand today in 2012, over 50 years!

Everyone has a different opinion on RRSP’s, but the key is to have your own understanding of RRSP’s, knowing the goods and the bads, and seeing if RRSP’s will work for your retirement plan.  Every one and every situation is unique, so while RRSP’s may work for some, they don’t work for others.  The key is not to take the facts and opinions of the people selling RRSP’s, form your own opinion!  Everyone should have an RSP (Retirement Savings Plan), but an RRSP is a choice.

Here is a statement by the CD Howe Institute, a very reputable research firm “Millions of Canadians accept the homogenous advice of governments and the financial community and put billions into RRSPs. However, for many lower-income Canadians RRSPs are a terrible investment. They are victims of a fraud, however unintentional. Only when more Canadians are aware of the perverse treatment of lower-income citizens’ savings will Ottawa be forced to develop measures that reward, rather than punish, their savings efforts.”  So we see clearly here that RRSP’s are not good for lower-income Canadians!  Other studies show that very few Wealthy people do RRSP’s, as there retirement plans are Real Estate, Businesses and other investments held outside of RRSPs.  So we can now see that the group of people in Canada that are eligible to do RRSP’s are the middle class!