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RRSPs

Taxes

Should I Contribute To My RRSP This Year?

Canadians have until March 1^st to make an RRSP contribution towards their Registered Retirement Savings Plan (RRSP) in order to take advantage of a tax deduction for the 2010 tax year.

Before you make this important decision, be sure to consider a few things:

Do you have the ability within your budget to make a contribution?

If you haven’t been contributing regularly all year, have you set enough money aside in order to make a lump sum contribution?

If you will be dipping into your emergency funds in order to make your contribution or you will be left just scraping by, then perhaps it is wise to just hold off in making any contributions this year. Why? Because if you are depending on your RRSPs as a back up emergency fund then there is no point in putting money into an RRSP in the first place. There are just too many tax penalties and negative implications for making an RRSP withdrawal.

January 20, 2011

Investing

When Is It A Good Idea To Have An RRSP?

Most Canadians are aware of the existence of Registered Retirement Savings Plans (RRSPs) but they really do not know much about how they actually work or how they can use them to benefit them fully. Until just a few years ago, I thought that once you turned age 65, you were allowed to take the money out of them. How little did I know! Unfortunately most Canadians are still in the dark about RRSPs and when it is wise to use them.

RRSPs can be especially useful for regular employees who pay a lot of tax on their employment income. By contributing to an RRSP, they are allowed to defer their income tax. They benefit from lower taxes payable now, and then will expect to pay it later when they withdraw it (presumably when they retire and are at a lower tax bracket).

December 5, 2010

Taxes

Withdrew Money From Your RRSP in 2010? You Might Have An Unexpected Tax Bill

With the economy still uncertain, some Canadians have turned to their Registered Retirement Savings Plan (RRSP) as a source of funds. But there could be tax consequences on your 2010 tax return.

Lose your tax shelter: RRSPs are designed to help Canadians save for retirement and provide a tax shelter for the funds. You lose the sheltering benefits when you make a withdrawal.

November 27, 2010

Investing

The Best & Worst Time To Make an RRSP Withdrawal

Withdrawing from an RRSP can be an extremely expensive option due to the tax consequences. So, unless you are saving for retirement within your RRSP, or you are planning on taking advantage of the Lifelong Learning Plan or the First Time Home Buyer’s Plan, I would not recommend saving within an RRSP investment vehicle.

To illustrate this, suppose you are 25 years old and you have managed to save $5000 in your RRSP. You end up spending too much money over Christmas and find it impossible to keep up with all your bills. You decide to withdraw $2000 from your RRSP.

By doing so, you have lost $2000 worth of RRSP contribution room. You can never get this contribution room back.

As well, you will be subject to a withholding tax of 10% in all provinces (except Quebec where you would have to pay 21%) that would be taken off the top and sent to the government. So, even though you are withdrawing $2000, you would only get $1800 at the end of the day or even less in Quebec.

You will also need to add the full $2000 to your income for the current tax year, and then depending on your income tax bracket, you will likely have to pay more tax at the end of the year unless you deliberately make an RRSP contribution to offset the withdrawal.

February 25, 2010

Investing

RRSP Retirement Savings Tips for 2010

1. Start contributing today into your RRSP for the 2010 tax year rather than waiting until the last minute to contribute. If you can’t afford a lump sum contribution, start up a preauthorized contribution that comes directly out of your bank account on the same day that you get your paycheck. By investing regularly throughout the year instead of contributing a lump sum at the RRSP deadline, your money will have more of a chance to grow for you, and will significantly impact your returns over the long term.

2. If you think you will earn more money in future years, consider deferring your tax deductions until a later tax year. Just because you contribute in 2010, it doesn’t mean that you have to benefit from the tax deduction in 2010. Save it for a year that you expect your marginal tax rate to be much higher. For instance, full time students with part time jobs who want to start saving for retirement, will likely benefit from deferring their tax deductions.

3. Take advantage of a spousal RRSP if you expect your spouse’s income to be lower than yours when you reach retirement age. By splitting your income it will result in a lower tax bill in the future.

February 5, 2010

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