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“Action is eloquence.”
— William Shakespeare, English poet and playwright, (1564 – 1616)
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Adrian Mastracci, portfolio manager at KCM Wealth Management, says “The ongoing debate of whether or not to RRSP depends on the personal circumstances of each investor. Decisions are not always black or white." |
Vancouver, BC (February 2, 2008): RRSP advice is again being dispensed. Should all or part of the deposit be made? Perhaps, skip it altogether? How about the alternatives? And so on...
Adrian Mastracci, portfolio manager at KCM Wealth Management says, “So many questions. Often, too many answers. Uncovering a simple tactic that fits everyone would be so delightful.”
You guessed it. That is not the case. Far from it. The ongoing debate of whether or not to RRSP depends on the personal circumstances of each investor. Decisions are not always black or white.
While there is not one simple answer, many investors should benefit from RRSPs. Although, not everyone will receive maximum profit from it. Part of the quest may be finding cash for deposits.
RRSP Overview
2007 RRSP entitlement is 18% of 2006 earned income, to a maximum of $19,000 ($20,000 in 2008). This amount is reduced by pension adjustments. Past service contributions may also affect it. Deposits made by February 29, 2008 can be deducted in the 2007 income tax filing.
Some RRSP decisions are now muddied. It may be more advantageous to personally receive dividend income and skip the RRSP. Eligible dividends are taxed very favourably in the low tax brackets.
However, the higher dividend grossup is annoying to retirees who encounter the "OAS clawback". The 2007 clawback starts at net income near $63,500; rising to about $64,700 in 2008.
Spouses can split up to 50% of qualifying pension income. If the spouse is deceased, or there is no spouse, this provision is of no value. Clearly, today’s RRSP decision has become more involved.
Nevertheless, there are three good reasons to invest in RRSPs:
- Long-term tax deferred growth,
- Future withdrawals at (ideally) lower tax rates, and
- Immediate deductions for tax purposes.
RRSP debates make several assumptions about the investor's asset accumulation and retirement phases. They may be more important today as more savings plans are becoming stretched.
There are many shades of gray to RRSP decisions. Moreover, decisions can change every year. These comments help reach the assessment.
Leaning to the “no” camp
- Investors in low tax rates during the asset accumulation phase will likely prefer investing outside the RRSP. They may not realize sufficient benefits from RRSP deposits.
- Investors seeking growth may find less appeal in the RRSP. Pursuing a blend of investing less capital inside the RRSP and more outside the RRSP is a likely choice.
- Say an inheritance is received. The tax rate during retirement could be higher than before. Hence, it could produce some regrets in having investments concentrated inside the RRSP.
- Investors who have a large "pension adjustment" from the employer pension often have little or no RRSP room. Hence, little or no benefit is derived from the RRSP.
- Business owners have the alternative of an Individual Pension Plan (IPP). For some, the RRSP is not necessarily the most beneficial vehicle to save for retirement.
Leaning to the “yes” camp
- Investors who emphasize capital preservation will find the RRSP beneficial. They typically make the RRSP strategy a high priority.
- Investors in the lower tax rates during retirement vs. the accumulating phase will be pleased about having invested inside the RRSP.
- Self-employed investors view the RRSP differently as they likely have no pension plans. For many, the RRSP becomes a replacement for the employer pension.
- Investors who apply the RRSP income tax savings productively will experience more benefit from the RRSP strategy. Such as accelerating the mortgage or credit card debt.
- Investors who prefer interest income in the RRSP, while pursuing dividends and growth outside the RRSP, will benefit from a blend of the two avenues.
Retirement planning, inclusive of the RRSP, ought to fit like a glove with personal investment strategy. Every investor should explore the alternatives for maximizing the retirement income stream.
For many, the RRSP is one pillar of the retirement plan. Just don't let tax events wag the strategy. The bigger question is "what is important about the finances".
Lastly, don't fret about making the “best” decision. Results can only be judged in hindsight. Sleep a little on the RRSP debate. Then take action that suits your personal needs and objectives.
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