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| Adrian Mastracci,
financial advisor with KCM Wealth Management, says
he encourages both strategies in terms of repaying
a mortgage and making RRSP contributions. |
By: Gigi Suhanic
National Post
FP Money, RRSP Clinic
Saturday, February 1, 2003
Question:
Can you transfer money from a grandparent's RRSP into
a grandchild's RESP without penalty after death?
Answer:
It would be nice, but no, you cannot transfer the grandparents
RRSP into an RESP, says Ryan Beebe.
There are very limited situations where the funds could
be transferred to a grandchild revolving around mental/physical
disability, but transfer to an RESP is not one of them.
Question:
With interest rates as low as they are, many couples
in my life stage (25 years old, recently married, both
employed full time) have made the decision to buy a
home instead of rent. We did this last year.
The financing of our downpayment was done through the
RRSP Home Buyer's Plan, which means our RRSPs are now
empty and the 15-year repayment has begun.
Is it better to pay down as much as possible our principal
amount on the mortgage or maximize RRSP contributions
above the 1/15 year amount we are expected to pay back?
Answer:
There will never be only one answer to this debate,
says Adrian Mastracci of KCM
Wealth Management, a financial advisor in Vancouver.
One of the pillars of financial planning is to pay
yourself first. Thankfully, both the RRSP deposits and
mortgage acceleration qualify.
It is hard to find fault with pursuing one or the other
as the preferred strategy. However, where the opportunity
exists, I suggest pursuing a combination of both.
Before you make your selection, take the time to review
your financial game plan.
Two things are important in pursuing your RRSP strategy.
First, make the deposits. Secondly, accumulate as much
as possible inside the RRSP on a tax-free basis until
it is withdrawn.
Understanding the investment risks that you take inside
the RRSP will help. Remember that capital losses inside
an RRSP are not deductible for tax purposes. The key
in pursuing the repayment of your mortgage is to retire
it within 10 to 15 years, or sooner, rather than the
typical 25 years.
Obtain three amortization schedules that depict the
"what if" scenarios of accelerating the mortgage.
Say to a 10, 15 and 20 year time frame. For example,
assume a $100,000 mortgage at 6% for 25 years. Repaying
it in 20 years saves $20,500 in interest. Repaying it
in 15 years saves $40,200. Of course, you will have
to find the extra mortgage payment.
I encourage both strategies. It gets the investors
thinking about pursuing more than one positive aspect
of their finances.
An approach is to allocate the tax savings from the
RRSP deposit to the repayment of the mortgage, especially,
if the mortgage interest is not deductible. Another
is to pursue one strategy, say the mortgage, and later
switch to the RRSP. But do make the annual homebuyers
plan repayment.
Question:
I am a landed immigrant and have been living and working
in Canada since March, 2002. I would like to set up
a retirement plan as soon as possible.
Can I set up and contribute to an RRSP now, based on
earnings prior to arrival in Canada? Do I need to wait
until after I have submitted my first tax assessment?
Answer:
Your RRSP contribution limit is calculated using the
net earned income you report on your Canadian tax return.
Income you earned prior to becoming a Canadian resident
is not included in the RRSP limit calculation, says
JoAnne Anderson.
Your RRSP limit is based on the previous year's income
so your first RRSP contribution can be deducted on the
tax return you file for the 2003 taxation year. You
can make an RRSP contribution for the 2003 tax year
anytime after Jan. 1, 2003.
After you file your tax return for 2002, Canada Customs
& Revenue Agency will send you a Notice of Assessment
that shows your RRSP contribution limit for 2003.
Or you can estimate your 2003 RRSP limit now. The RRSP
limit for the year is calculated as 18% of earned income
in 2002, to a maximum of $13,500. This limit is reduced
by any "pension adjustment" reported on a
T4 issued by your employer.
You can also take advantage of the provision to over-contribute
to your RRSP. You can deposit up to $2,000 into your
RRSP over and above your regular limit. This contribution
cannot be deducted from your taxable income, but any
investment income it earns will be tax-sheltered.
For more details, consult Canada Customs and Revenue
Agency's guide, "RRSPs and other Registered Plans
for Retirement."
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