RRSP Numbers
November 1, 2008 by admin · Leave a Comment
There are two main benefits of an RRSP.
1) Immediate tax savings
2) Tax-free compounding.
Most people only focus on the immediate tax savings.
Immediate Tax Savings:
Example: Place $2,000 in an RRSP
Taxable Income for BC Marginal Tax Rate (BC )
$20,000 20.35% $407 Taxes Saved
$40,000 30.15% $603 Taxes Saved
Tax Free Compounding:
- Example: $10,000 earning 10% for 10 years
Taxable Income Marginal Tax Rate (BC )
Compounding inside RRSP
- $20,000 20.35% $25,937
- $40,000 30.15% $25,937
Compounding outside RRSP
(interest)
- $20,000 20.35% $21,519
- $40,000 30.15% $19,644
What Investments are eligible for an RRSP?
- GIC’s
- Mutual Funds
- Stocks – Self-Directed
- Bonds – Self-Directed
- Property – Self-Directed
Does it Make Sense to Borrow To Fund Your RRSP?
Let us assume that you are in the approximate 50% marginal tax bracket (see above).
If you borrow $1,000 the government will give you back $500.
Your cost is likely to be prime or prime plus 1%. Let’s assume that it is 7% for this example.
Over a one year period your monthly payments would be $86.53.
The total cost to borrow is $38.36 ($86.53 x 12 – $1,000 = $38.36).
If you are 30 years old and plan to retire at age 65 that $1,000 will grow to $28,102 at 10%. By age 71, when you have to start taking money out in a RRIF it will be $45,230.
So let’s add this up. You paid $1,000 but the government gave you back $500 so your net cost is $500. Add to this $38.36 for a total of $538.36. This is likely to get you $45,230 at RRIF age. (based on the 10%) So borrowing can make sense.
Be sure to get qualified financial advice before proceeding with any kind of borrowing money to invest. Even for RRSP lending.
RRSP’s Contribution Limits and Withholding Taxes
November 1, 2008 by admin · Leave a Comment
RRSP’s Contribution Limits and Withholding Taxes
It’s important to know how much you are allowed to put into your RRSP. If you over contribute, you will get penalized by the government.
Your allowable RRSP contribution for the current year is the lower of:
- 18% of your earned income from the previous year, or
- The maximum annual contribution limit for the taxation year, or
- The remaining limit after any company sponsored pension plan contributions.
Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income.
3 Ways to Find out Your RRSP Contribution Limit
There are three easy ways to find out the amount of RRSP contributions you are allowed to deduct for your income taxes.
1) Check Last Year’s Income Tax Notice of Assessment. Your RRSP deduction limit can be found in the RRSP Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment.
2) Call the Tax Information Phone Service (TIPS) at 1-800-267-6999. The service is available from the middle of September to April 30. You will be asked for your Social Insurance Number, your month and year of birth, and the total income you reported on line 150 of your income tax return for the previous year.
3) Use the My Account Service You can also use the Canada Revenue Agency My Account service online to find out the limit of your RRSP contributions allowed for your income taxes.
Please note that before you can access the My Account tax service for the first time, you must register for a Government of Canada epass.
Company Pension Plan or Deferred Profit Sharing Plans
As a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RRSP must be reduced by the total value of the pension credits you earned for the year.
This amount is referred to as a pension adjustment (PA) and it is reported on the T4 slip (Statement of Remuneration Paid) that you receive from your employer.
Annual Contribution Deadline
To be eligible for an RRSP deduction in a specific taxation year, you can make contributions anytime during the year, or up to 60 days into the following year.
Carry-forwards
If you can’t make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. The amount of your unused contribution limit is shown on your federal Notice of Assessment.
You may also choose to delay claiming your current year’s RRSP tax deduction. To take the deduction in a later year, you must make sure that your allowable deduction limit has not been reached.
Over Contributing to your Plan
If you make an RRSP contribution beyond your maximum allowable amount for a year it is considered an over-contribution. There is a lifetime allowance of $2,000 for over-contributions. These contributions must be used before any new contributions are applied.
Annual Contributions
You may contribute to your RRSP until December 31 of the year in which you reach age 71. The following limits and deadlines apply annually.
Maximum annual RRSP contribution limits
Year Contribution limit
- 2007 $19,000
- 2008 $20,000
- 2009 $21,000
- 2010 $22,000
You may open as many RRSP’s as you wish. You are free to transfer your RRSP’s between financial institutions at any time without being subject to tax.
You can also move some or all of your money between eligible investments within your RRSP. There are no tax consequences if transferring between RRSP’s. You must use an approved transfer form to do so however. Your Financial Advisor will help with that.
Withholding Taxes
Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf.
Effective January 1, 2005, the following withholding tax rates apply:
Amount of RRSP Withdrawal All Provinces Except Quebec
- Up to and including $5,000 10% 21%
- $5,001 to $15,000 20% 26%
- More than $15,000 30% 31%
You will receive a T4 RRSP receipt for any funds withdrawn during the year showing the amount to be included in your taxable income and the credit for the withholding tax.
Be sure to read the article “RRSP Math”. It will explain some of the numbers behind all this.
RRSP Basics
November 1, 2008 by admin · Leave a Comment
Imagine a scenario in which the Canadian government pays you almost half of the money you require to make the investment of your choice.
A GIC or a hot stock –it’s your call. Then, when you’ve made money on that investment, be it through interest earned on a bank account, or capital gain and dividends generated by your mutual fund, the government tells you don’t have to pay tax on it.
Only one in three Canadians currently take advantage of the federal government’s most generous form of tax relief –the Registered Retirement Savings Plan –commonly known as the RRSP. An RRSP is a government approved program that is designed to encourage Canadians to save for their retirement by providing powerful tax reduction options.
The tax breaks come in two forms. The first is that once you set up an RRSP, the financial contributions you make are deductible from your taxable income.
Taking an example from Gordon Pape’s 9 Low Risk Ways to Get (& Stay) Very Rich, this means that people in the middle tax bracket whose marginal combined federal/provincial tax rate is somewhere around 42% would receive a tax refund of $2,100 on a contribution of $5,000.
Therefore, the "real" cost of the investment is only $2900 but the full $5,000 is still working inside the plan.
The second tax advantage resides in the sheltering of the income and capital gains that are generated by the investments in your RRSP. Simply put, your money is allowed to grow tax free. Anyone who has ever invested outside of an RRSP knows that the interest earned is heavily taxed. Likewise, capital gains tax is levied on investments like stocks and mutual funds.
But all investments within an RRSP are effectively "sheltered" from tax and allowed to compound. Using the example once again of the RRSP holder in the 42% tax bracket, let’s examine the effects of an investment of $10,000 GIC paying 10% interest held both inside and outside an RRSP.
In a sheltered plan where no tax is paid, the investment would grow in value to $16,105 in five years. Outside of an RRSP,
the investor would be required to pay $2,357 in tax resulting in a cumulative value of only $13, 257.
But why you ask, would the government in these desperate times of budget slashing and tax grabbing allow itself to miss out on such lucrative revenues? Aren’t governments supposed to encourage consumer spending, not saving?
The answer may well be simpler than the question. Governments are broke. They quite simply do not have the resources to continue to support the growing number of retired Canadians who will be dependent on government-sponsored pension plans in the future.
RRSP’s are one method by which the federal government can encourage people to take responsibility for their financial future.
Once you’ve determined the amount of money you can afford to put into your plan, the next decision must be where to invest. Fortunately, there is a plethora of options. Among them Canadian equities, mutual funds, segregated funds (My
Favorite), Treasury Bills, bonds, stripped coupons, GIC’s and the list goes on.
It is best to explore your options with a financial adviser –one who can help you identify the options that are best for you. After all, it’s your money and your future. Make sure you read the article titled “RRSP Contribution Limits And With-holding Taxes" to find out your allowable contributions.