RRSPs are vital and should be among primary investments
Registered retirement savings plans (RRSPs) were introduced by the Government of Canada more than 50 years ago to encourage Canadians to plan and save for their retirements, rather than relying on government or company pensions. RRSPs are the single most significant opportunity for tax-sheltered, tax-deferred investment available to Canadians.
Will you be able to retire when the time comes? Statistics Canada has recently confirmed that 25% of our seniors are currently living in poverty, after working and contributing to our communities all their lives. As of 2010, Service Canada confirms that current government pensions, combining Old Age Security and Canada Pension Plan payments, provide an average of $11,244 and a maximum of $17,414 to individuals over age 65. Few of us would be able to live on these amounts alone, and company pensions are not available to many Canadians. Clearly, more of us should be making the most of RRSPs. Remember you should pay yourself first.
The key benefits of RRSPs include: (1) contributions are immediately tax deductible; (2) investments compound over the long term on a tax-deferred basis as long as they remain in the plan; and (3) a wide variety of funds and financial products are eligible and available.
Annual RRSP contribution limits are 18% of earned income, up to a maximum of $22,000 for 2010. RRSP contribution limits should be indexed to inflation going forward, and can be carried forward over time if they have not been maximized. Check your Canada Revenue Agency Notice of Assessment for information on your current RRSP contribution limit. It is likely that you have unused RRSP contributions, from previous tax years, available for RRSP contributions for the 2010 tax year. The deadline to contribute is 60 days after the end of the year. For the 2010 tax year, the deadline is Feb. 28, 2011. Most Canadians have lots of catching up to do. Contact me directly to arrange your RRSP investments.
RRSP portfolios may include mutual funds, equities, bonds, cash, and other registered investments. RRSP mutual funds range from conservative, low risk, and low growth to more aggressive, higher risk, higher growth investments. Foreign content limits no longer apply, so Canadians can benefit from exposure to global financial markets. Investors can maximize their benefits by including mutual funds containing equities eligible for dividend income and associated tax credits as an additional tax shelter. While many investors may be reluctant to invest in stocks after the recent economic downturn, many securities-based funds have already rebounded and regained any previous losses.
Canadians are generally carrying too much debt and saving too little. Young workers often prefer to ‘live now’ and ‘pay later’, while those in their peak earning years have compelling reasons to invest in homes, businesses, their children’s education, vacations, vehicles, and other family expenses. However, the right time to invest is always ‘now’. Those who postpone saving for retirement until too late often find they cannot afford to retire when the time comes. As we know, government pensions are likely to be inadequate, and company pensions are not available to many. RRSPs are among the most useful long-term, tax-deferred investments available to all working Canadians.
Regular pre-authorized deposits to your RRSP account throughout the year allow you to benefit from greater long-term returns and ‘dollar cost averaging’, which limits the effects of price fluctuations and purchases mutual fund units and equities at a relative discount, compared to peak demand periods. RRSP loans (with deferred loan payments and using tax refunds to pay loan interest) may also be a cost-effective strategy for many investors.
Younger investors with many years to retirement have many more years to recoup potential losses, and should consider including a greater proportion of aggressive funds in their RRSP portfolios. Those closer to retirement may wish to have a greater proportion of conservative funds to conserve value. A family of products called segregated funds offers reassurance to ‘nervous’ investors by guaranteeing to protect the principal invested over the long term, even if the markets decline in future. Consider your risk tolerance, and emphasize long-term investment rather than short-term market volatility. Over time, markets have more than recovered their losses, and continued to prosper. Your RRSP investments should too. As well, consider the need to beat inflation down the road when planning your investment strategies now. How much will you need to retire?
One of the greatest investment errors is to immediately ‘dip in’ to an RRSP fund for a short-term need for funds, to the detriment of long-term investment earnings and retirement planning. Tax on RRSP withdrawals is payable at lower rates during lower income earning periods. Most withdrawals from RRSPs prior to retirement will bring withholding tax, even for amounts under $5,000, and will be treated as taxable income, except for eligible withdrawals for the Home Buyer’s Plan (up to $25,000 for a down payment) or the Lifelong Learning Plan ($10,000 per year, maximum $20,000 total) to fund full time education or retraining for oneself or one’s spouse.
Contact me for a range of RRSP eligible funds for balanced and diversified growth, on a tax-deferred basis, and to benefit from combining Tax Free Savings Accounts (TFSAs) with your RRSPs to protect your investments from taxes while having access to the funds you need. RRSP loans (with deferred loan payments and using tax refunds to pay loan interest) may be a cost effective strategy for many investors. I’d be pleased to discuss retirement, investment, estate, tax, and financial planning tailored to your specific needs. Thank you. I look forward to hearing from you. Wishing you a very Happy New Year and a fantastic 2011.