WEALTH MATTERS: Your RRSP questions answered
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Jan 20, 2017  |  Vote 1    0

WEALTH MATTERS: Your RRSP questions answered

Metroland Media
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Welcome to RRSP season, otherwise known as the one time of year you'll willingly read an article with RRSP in the title. It's not a traditionally exciting topic, we get it, but it's an important one! A little planning now will pay off big time later.

To start, we're going to walk you through some of the most common questions we hear, continuing with more retirement related talk in the coming weeks.

Let's get into it!

What's so special about the RRSP?

A Registered Retirement Savings Plan is an account (think of it as a basket) that holds savings and investments. The magic of the RRSP is twofold: contributions are made with pre-tax income, meaning you'll get a tax refund, and investments grow inside your RRSP basket tax-free. That's right, the tax man isn't allowed to stick his hands in there. Compound interest is left to do what it does best – grow your nest egg!

Just remember, deferring tax doesn't mean you'll avoid paying it altogether. You'll have to pay taxes when you withdraw money during retirement just as you would on any other income. The idea is you should be in a lower tax bracket when you retire and take out money, therefore you'll pay less tax overall. Making sense so far?

What kinds of things can I put in my RRSP?

You can fill your RRSP basket with investments like stocks, bonds, GICs, mutual funds, ETFs, and money market funds. A common misconception is that a RRSP is an investment you purchase. It's an account you open (think basket) and fill with investments you buy.

How much can I contribute this year?

You can contribute up to 18% of your income to a maximum of $25,370 for 2016. Your contribution room accumulates over time so if you haven't maxed out your contributions in the past (many people haven't!) you'll have even more room available. Check the notice of assessment you received with last years tax return, or give CRA a call, to find out exactly how much contribution room you have.

What's this contribution deadline I've seen advertised?

The stretch between New Years and the contribution deadline has been dubbed “RRSP Season” which you've likely seen advertised at local banks. March 1st, 2017 is the latest you can contribute to your RRSP and have the deduction count for the 2016 tax year.

This doesn't mean any contributions made during January and February 2017 have to be claimed against the 2016 tax year. If you want to make a contribution now and save part or all of the deduction for 2017 (perhaps you're expecting your income to be higher), you can do that.

How often can or should I contribute to my RRSP?

All this RRSP season hype might give you the impression you can only contribute once a year, but that's not true! You can set up regular automatic contributions (monthly, quarterly, etc) and avoid the RRSP season rush altogether.

An unexpected expense came up – can I withdraw money from my RRSP to cover it?

You can, but it might not be your best option. Depending on how much you withdraw, you'll be charged a 10-30% penalty and you'll have to pay income tax on that money. Keep in mind you won't be able to re-contribute the amount you withdrew at a later date. That contribution room is lost.

Two ways you can withdraw money without penalty is under the Home Buyers Plan and the Lifelong Learning Plan. The former is eligible to first time home buyers, while the latter is available if you enrol in a qualified education program.

What happens to my RRSP when I retire?

Regardless of when you decide to retire, you'll have to close your RRSP by December 31st in the year you turn 71. You can withdraw all your money (and be hit with a hefty tax bill), purchase an annuity, or transfer it into a Registered Retirement Income Fund (RRIF). You don't have to convert your RRSP to a RRIF when you turn 65 or at the same time you retire. You can convert it at anytime before you turn 71.

What should I consider when opening or moving my RRSP?

You'll need to look at the fees you're paying – these include management expense ratios (MERs) for any mutual funds or ETFs, trading commissions, and annual administration fees. You want to keep these fees low so your money can grow as much as possible. If you're working with a financial advisor, check your statements to verify how much you're paying. If you're looking for lower fee investment options, consider going the self-directed route or opening account with one of Canada's digital wealth advisors.

Phew, you made it! You can sleep easy knowing you're well on your way to mastering your RRSP and reaching your retirement goals. Knowledge is power, my friends.

Randy Cass is founder and CEO of Nest Wealth, Canada's first online subscription investment service. Metroland is a strategic investor in Nest Wealth.

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(7) Comment

By mechone | FEBRUARY 24, 2017 08:00 PM
I can't believe all the negative comments RRSP are a great savings tool. You get the tax back on the money you put in ,so you are not taxed twice. With the tax money you get back invest in TFSA. Self direct buying dividend stocks and Gic's and ladder the GIC's over 5 years so you are always getting the max interest rate. I started at 22 and went thru the bank buying mutual funds and GIC's until I was 45 with little growth. As soon as I self directed it took off GIC rates are higher on open market than the bank can offer. I also buy dividend stocks outside of RRSP which income is only taxed at 15% rate I'm now 54 with close to a million
By Yves | JANUARY 23, 2017 09:45 PM
If hiring a financial planner, do a lot of research. There is no real code of ethics out there whereby the industry is structured to serve the client. After getting a few assessments and recommendations, looking at the way forward, I found that I am doing better just on my own. One does have to be careful though. Having too much in an RRSP means paying higher tax rates down the road and losing OAS as a source of revenue. When the RRSP is sufficient, excess funds should go into the tax-paid TFSA. It can be invested in a manner similar to RRSPs, grow tax-sheltered and withdrawals are tax-free.
By Yves | JANUARY 23, 2017 09:40 PM
RRSPs, if set up properly, will provide good income in retirement. Unfortunately, there is a lot of research to do to accomplish this and most people are woefully unprepared. Many succumb to fear and greed and lose their shirts. Others just hand their money over, follow the computer model generated for them and get killed by the fees. The best or a lot of people is to simply set up a self-directed plan and invest in good businesses that actually make money - not just hype. This can be done through index funds (lowest fees) or buying stocks directly without putting all one's eggs in the same basket.
By Mike | JANUARY 22, 2017 02:08 PM
@Michael - I cannot imagine who would be disagreeing with you as what you state is correct. RSPs are an excellent way of deferring taxes and buiding a retirment nest egg tax free. The idea is to withdraw money at what , for most, would be a lower tax rate than when you are earning more income. A financial planner should be used to determine how to best grow retirement savings, pensions etc and minimize taxes. TFSA are great tool as well.
By Michael | JANUARY 21, 2017 08:48 PM
A lot of misinformation, both in the comments and the article. RRSPs are a very efficient tax deferral mechanism that allows retirement savings to grow tax free. The article calls the 10 - 30% withholding tax on a withdrawal, a penalty which is a misrepresentation. It is a withholding tax similar to the withholding tax on employment income. The amount you withdraw is taken into income with a tax credit provided for the taxes withheld. The contribution is tax deductible in the year it was made. Tax is deferred on that amount until the time that you do withdraw it. Making the contribution in a year that you earn a higher income and withdrawing it in a year where your income may be lower can also result in tax savings.
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