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By: Gigi Suhanic
National Post
FP Money, RRSP Clinic
Saturday, February 8, 2003
Question: Do I have
to actually invest the funds as soon as I make
the RRSP deposit?
Answer: This is a very
relevant topic, especially during the frenzy of the
RRSP season when many investment decisions are made
without any plan of action, says Adrian
Mastracci, president of KCM
Wealth Management in Vancouver.
He says security selection should be the last item
on the list. Park your RRSP funds in a short-term instrument,
say a 60- to 90-day term deposit. Don't even ask about
the rates. Yes, they are puny. Then spend the time to
review or put together the investment plan appropriate
for your situation before you invest.
The benefit is that you will have the time to arrange
and implement your game plan without the pressure of
having to decide on the long-term investment.
Adrian Mastracci, investment
counsel at Vancouver’s fee-only KCM Wealth Management,
says, “Your decisions on allocations among equities,
bonds and cash investments have the biggest impact on
your RRSP portfolio.”
Start with the type of investment personality that
suits you: conservative, income, balanced, growth, aggressive
or speculative. Relate the amount of diversification
to your investment time horizon.
Your decisions on allocations among equities, bonds
and cash investments have the biggest impact on your
RRSP portfolio. Once you have determined your asset
allocations, it is also important to resist the temptation
to stray from your appropriate targets.
Performance has been overemphasized to death. A portfolio
with emphasis on consistent returns will serve you better
in the long term than one which emphasizes hot performance.
Question: On the death
of an RRSP owner, does the beneficiary pay taxes or
can he/she transfer the RRSP with no penalty?
Answer: If the beneficiary
of the RRSP is a spouse of the deceased RRSP planholder,
no taxes are payable on the RRSP lump sum received,
says Jim Rogers. However, this surviving spouse will
be subject to income tax on any income drawn from this
lump sum. As well, income tax will also be payable --
by the estate of the surviving spouse -- on any remaining
lump sum when, eventually, this surviving spouse dies.
If the beneficiary is other than a spouse (and the
beneficiary is not a disabled and dependent minor where
certain relieving provisions may apply), the RRSP proceeds
are taxable as ordinary income in the terminal tax return
of the deceased.
Question: I have credit
card debt of about $20,000 and was wondering if it is
a good idea to cash in my RRSPs of about $10,000 now
to pay off my debts rather than making the minimum payments
every month?
How will this affect the worth of my RRSPs and are
there any penalties or fees?
Answer: Generally speaking,
it is punitive to cash your RRSP, says Robert Fleischacker.
Assuming you still have taxable income, the surrender
will be taxed at your top marginal rate this year. A
$10,000 withdrawal is subject to 20% withholding tax
so you will only net $8,000 for debt reduction and you
may still owe more tax in April, 2004, further compounding
your debt problem.
Depending on the type of investments inside your RRSP
you need to be sure there are no other
penalties like early redemption charges on mutual funds
or market value adjustments on GICs.
You should be able to approach your bank or credit
union and arrange a consolidation loan at a much lower
interest rate. There is a popular misconception that
RRSPs are emergency funds. Obviously, using these accounts
for anything but retirement savings can be costly.
Question: I am 55 years
old and am thinking of converting my RRSPs to RRIFs
and maybe retire early by drawing monthly income from
it without getting taxed. Is this strategy possible
and acceptable under the eyes of our tax authorities?
Please advise so I can prepare my golf paraphernalia
ahead of time; if not then I'll just go fishing once
a month.
Answer: There is nothing
keeping you from retiring and simply withdrawing amounts
from your RRSP annually, says Kevyn Nightingale.
In fact, an RRSP is better than an RRIF, because with
a RRIF, you have to withdraw a minimum amount annually,
whether you want to or not. With an RRSP, you have full
freedom to take out money, or not, as you please. Withdrawals
from an RRSP and a RRIF are taxed identically. The amount
of the withdrawal is added to your income, and you are
taxed on it at ordinary rates.
The choice to retire early and withdraw savings funds
is not one to be taken lightly. The additional years
of tax-free compounding growth, not to mention additional
years of contributions, can mean the difference between
a comfortable old age and a not-so-comfortable one.
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