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.
Segregated Funds
November 1, 2008 by admin · Leave a Comment
A segregated fund can be a great way to invest for the long term.
segregated fund is simply an investment structure much like a mutual fund but it is offered through an insurance company. Because an insurance company is offering it, there are a number of benefits that mutual funds don’t have.
Segregated funds vary quite a bit, but the following is true for all segregated funds:
1. Creditor protection. (on a case by case basis) If you can establish that you didn’t invest your assets in a segregated fund to avoid your creditors, it is protected.
2. Did you know that when you die, your Will becomes public record? This is one of the reasons why you see wills contested. One of the features of a segregated fund is the ability to name a beneficiary. This is helpful in a few ways. First – you bypass your estate which allows you to eliminate probate fees. Second – privacy. Your beneficiary receives the funds
directly when it bypasses your estate. No one can contest it or look it up at the courthouse.
3. 75% – 100% of your principle is guaranteed if you leave it for 10 years. This means you are guarantying your principle if times stay bad and still taking advantage of the markets if times are good.
4. All this and if the market does well, you get to participate in the growth while reducing your risk because of the guarantees.
This next point is only true of a few segregated funds in the market:
5. Some segregated funds offer an additional guarantee of 5% per year growth or income on the amount invested if you leave it for 10 years. So if the market doesn’t perform, you still grow your money..
Makes you wonder why everyone that has investments doesn’t have a segregated fund.
Make sure you don’t tackle this alone. Get professional help from someone that knows how to put this together for you.
Eliminating Debt And Owning Safe Investments In These Markets
November 1, 2008 by admin · Leave a Comment
A recent article on MSN titled "Bad Times Ahead For Good Companies" states "The collapse of market value since autumn has actually wiped out years of progress, putting all but a few big companies’ returns for the decade below zero — an extraordinary development that has jeopardized thousands of families’ financial plans". Scary stuff.
We are living in a time where wild fluctuations in the market,combined with continuing crises in other areas of the economy, are affecting us all. From our investments, our debt load, our jobs, our security.
Looking after our families in the event of our death is the purpose of life insurance. Many people have the wrong kind, the wrong amount and are paying to much.
Debt it as an all time high and continues to climb. Many people have bailed themselves out over recent years by consolidating debts into a line of credit or their mortgage. With the real estate market cooling down and values likely to decline, this option will not last. High payments, interest costs and little savings can combine into a financial disaster for many. Learning how to eliminate your debt is becoming critical for many.
I have worked in the Financial Services Industry since 1997. My focus revolves around helping families gain control of their debt and becoming financially secure.
Consider these stats:
- Roughly half of all working Canadian’s don’t participate in a retirement plan or don’t have an employer-sponsored plan in which to participate.
- A huge number of adults – according to one estimate, approximately 75%- are not saving for retirement in any meaningful way.
Dave Ramsey, a personal-finance expert and talk-radio host, cited a recent poll in which 80 percent of North Americans said they believed their standard of living would increase at retirement.
In our hectic world, most people seem to have little time to invest in anything besides work and family. Consider this: If your boss came to you tomorrow and said, "I want to give you a $800.00 per month raise. To get this raise, all I need you to do is take this ten hour course over the next 2-3 weeks." Would you do it?
Of course you are probably thinking, but what has this got to do with financial services? Well, what if a proper, well laid out financial strategy could save you $800.00 per month. Wouldn’t that be like getting that same raise? What if it was only $200.00. Or what if after implementing a sound strategy, you had $100,000.00 more at retirement. What if you were able to send your children to college because you took the time to learn some of these concepts?
Our culture today tells us that we deserve to have everything we want because we can charge it," Dave Ramsey says. "Previous generations thought you could only have something if you could pay for it. Their lifestyles were much simpler, and retirement was a time to simplify even more.
Surprisingly, you would think that we would work at simplifying our lives, however the opposite is true. Given a choice between a simple way and a complicated way of doing things, most people end up choosing the difficult direction.
There are few places that this is more evident than in the financial products and services that are offered to us on a daily basis.
It is easy to get financial "advice" from just about anybody; your co-workers, your relatives, your friends. There is a difference, though, between true advice and well-meaning opinion. People rarely take responsibility for the harm their opinions may cause.
Subscribing in the box that you will find on this site will give you the articles, updates and free reports that will help you in many ways.
Manulife One
November 1, 2008 by admin · Leave a Comment
Life Insurance. Term Insurance VS Cash Value Insurance
November 1, 2008 by admin · Leave a Comment
If you are looking for life insurance or already have it but feel you are overpaying, there are a few facts you should know.
Here is a couple of videos from third party sources that reiterate what I practice with my clients.
Video #1
Dave Ramsey On Term Insurance or Cash Value
Video #2
Suze Orman on Cash Value or Term
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.