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!

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!

Cross Border Brings Complications, Part 1

Many people never do anything out of Canada so they don’t have to be concerned with the complications of planning cross border.  However, there are many people that spend time in the U.S. and in other countries, invest across border, do business across border, and more.  Many people just get caught in the moment and move forward without seeking professional guidance.  If you are traveling out of the country for any extended time, investing across border or doing business across the border there are key details you must know.  The key point that I want to make here is that whenever you are doing anything cross border, it is imperative to see a professional or multiple professionals that can help to ensure you plan for any tax and reporting consequences that you may have to deal with.  For this blog and the next (parts 1 & 2), we will be mostly talk about cross border in the sense of Canadians dealing and traveling to the U.S. and as always the details in the blogs are date sensitive to the current dates that the blogs are written on.

To start with, let’s talk about some of the main issues that seem to arise when dealing and traveling cross border.  If you or your spouse have dual citizenship or have assets in the U.S. you most likely will have to file a U.S. tax return.  Many don’t file and it can catch up with them later down the road.  Many people just deal with the tax authority where they currently live, CRA in Canada the IRS in the U.S., and many people don’t even understand that there is a tax treaty between Canada and U.S. that determines how many things work for cross border assets, transactions, traveling and more!  Many people get double taxed by not understanding what the treaty offers.  For example the IRS tends to tax capital gains made on RRSPs if the holder is residing in the U.S. Worse, if the holder returns to Canada and discharges the RRSP, the holder gets no tax credit for tax already paid in the U.S. However, in a situation like this, it is possible to defer taxes by invoking the Canada/U.S. Treaty to stop the double taxation. The Canada/U.S. Treaty has been revised multiple times since its 1980 inception and will continue to evolve.  The Treaty can override sections of the Canadian and U.S. Tax Acts to help ensure double taxation doesn’t happen.

4th Step to Financial Freedom: Wealth Accumulation & Increase Passive Cash Flow part 3

Here are more places where you can find money to free up to generate passive income for wealth accumulation:

Business Equity – If you are self employed or you have a corporation with assets, you can leverage the assets and borrow against them to invest, providing more cash flow for your business.

What if you have money in retained earnings but you want to invest personally and you no not want to take the money out because you are worried about tax? Paying dividends can be really useful in this situation.

RRSP’s – The good thing about an RRSP is that you obligate yourself to put money aside for retirement. The second benefit is that you are deferring tax to pay it later.

Most RRSP’s are invested in Mutual Funds and many people who have mutual funds are not happy about the returns. Most of the people invest in mutual funds blindly because they do not know what stocks or bonds the fund holds. We need retirement plans but they do not need to be registered with the government.

To free up money from an RRSP, you have to check first if the RRSP is locked or unlocked. If the RRSP is unlocked, you can use a melt down strategy minimizing the tax you pay to pull out your RRSP. This is done by withdrawing your RRSP in increments of $5,000 to keep your withholding tax to 10% and then having a proper tax plan to offset that extra income. It is also good to withdraw RRSP in lower income years.

Once you free up the money, you can put it to work and make it your slave! Making money our slave allows us to become wealth with purpose.

Remember that investments come and go. We need to continually be open to new investments and opportunities. Make sure to consult a professional for new investment opportunities.