|
|
Top
Ten RRSP Planning Strategies
Did
you know?
If
you are earning over $35,000.00 and invest $5,000.00 per year at 8% outside
an RRSP, you will accumulate $170,000.00 in 20 years. With an RRSP, not
only is your contribution tax deductible, but also the interest earnings
are tax sheltered. The equivalent after tax investment in an RRSP would
grow to $472,000.00. Choosing the right product, the right strategy, an
independent financial planner and following the tips below will further
enhance your returns.
1) Contribute
at the beginning of the year or use automatic monthly deductions.Money
left in your savings account earns fully taxable interest. If you make your
contribution at the beginning of the year instead of the end you would increase
your return on a $5,000.00 annual deposit by as much as $30,000.00 over
25 years. If you can’t make an annual deposit, monthly contributions
throughout the year are the next best. 2) Increase
foreign content.New
rules for 2006 provide unlimited foreign content. Canada has never been
the top of performing stock market. Global markets out perform Canada by
an average of 2-3% per year. They also provide protection from a declining
Canadian dollar. Combined with new derivative based mutual funds, you may
have 100% of your portfolio invested internationally. Maximizing your foreign
content can increase your return on a $5,000.00 annual deposit by over $200,000.00
in a 25-year period. 3) Naming
a beneficiary.If
you die without a beneficiary designation, up to 50% of your total RRSP
value will be lost in taxes. Naming your spouse as beneficiary provides
for the tax-free transfer of your RRSP to your spouse’s RRSP at death
- a small detail that could save you hundreds of thousands of dollars. Naming
anyone as beneficiary may eliminate costly legal, probate and executor’s
fees.Consider naming a contingent beneficiary in case both you and your
spouse die in the same disaster. Life insurance beneficiary designations
may also protect your RRSP from creditors. 4) Make
effective use of spousal RRSP’s
Minimize
taxation by splitting your retirement income with your spouse. Two people
earning $25,000.00 per year will pay less tax than one person earning
$50,000.00. Using spousal registration does not increase your RRSP contribution
room, but it does allow you to transfer assets to a spouse while you maintain
the tax deduction. For example, if only one spouse has a company pension,
that spouse should contribute to a spousal plan in an attempt to make
retirement incomes equal. You will than get two sets of personal, old
age and pension credits and minimize the Old Age Security clawback.
I
frequently see both spouses making contributions to their respective RRSP’s
even though one spouse earns substantially more. Make your total RRSP
contribution deductible to the higher income-earning spouse up to their
RRSP limit first. This provides much greater tax savings and through spousal
registration does not alter who owns or controls the investments.
5) When
should I deduct my RRSP contribution?
You are not required
to take your RRSP deduction in the same year as you made the contribution.
Income tax rates are progressive. If you know that your income is going
to be higher next year, you may want to save your current RRSP receipt and
deduct it in the year that you will be paying more tax. The money continues
to grow tax free in your RRSP.
6) Take
advantage of Dollar Cost Averaging.
Dollar cost averaging
takes much of the risk out of mutual fund investing. By purchasing shares
on a monthly basis with a fixed dollar amount, you effectively get the average
price in a bull or bear market, substantially increasing your opportunity
for profit.
7) Diversify
your portfolio.
Diversify not
only by company, but also by country, investment type and investment term.
Diversification is your best guarantee of security. Canada only represents
2% of the world’s financial markets. It is impossible to be fully diversified
and invest only in Canada. Statistical analysis shows that the ideal combination
of foreign and Canadian investments is 52% foreign. This allocation will
yield the highest return with the lowest risk.
8) Exercise
caution with tax enhanced investments.
Labour Sponsored
Venture Capital funds appear to be very attractive when combined with an
RRSP because they give you an extra 30% tax credit. This means that a $5,000.00
investment by an Ontario resident in a 50% tax bracket would receive a $2,500.00
RRSP tax savings plus $750.00 from each of the Ontario and Federal governments
- a total of $4,000.00 in tax savings from a $5,000.00 investment. The downside
is that the funds invest in high-risk companies that may have no market
value. They also have high management, sales and administrative costs. The
nature of the investments mean there may also be liquidity problems.
9) Carry
forward of unused RRSP deductions.
Your CCRA (Revenue
Canada) assessment notice provides information on your current and unused
RRSP contribution room. This carry forward provision has been available
since 1991. Canadians have now accumulated a staggering amount of unused
RRSP contribution room. If Canadians used this deduction in 2001, it would
totally eliminate all income tax revenue for the year. It is unlikely that
the government will allow this situation to continue. Your plan should be
to eliminate your unused carry forward as quickly as possible. One way of
doing this is by borrowing to maximize your contribution. Although the interest
is not tax deductible, the tax saving and tax-sheltered growth make this
a very good tax-planning tool. Your financial planner can arrange RRSP loans
at very competitive rates.
10) Have
a balanced financial plan and an independent financial planner.
Your goals and
risk sensitivity will determine the choice and the allocation of your investments.
A good financial planner will help you make an informed decision. He will
make you comfortable that you have established a sound financial plan. I
represent you. I work for you. I am not employed by, nor do I have any obligations
to any bank, insurance or mutual fund company. |
|
