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By Sharon Adams
Regina Leader-Post
RRSP Extra
Monday, February 05, 2007
For those who just can't seem to get motivated to launch or contribute on a regular basis to a registered retirement savings plan, here are 10 good reasons to stop procrastinating and start thinking about this part of your financial future:
Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says, "If you or someone in your family needs emergency funds, you can tap into your savings."
1. A tax deduction: RRSP contributions are deducted from your income, moving you into a lower tax bracket and reducing the amount of tax you pay. The maximum contribution limit is 18 per cent of your previous year's earned income, up to a maximum of $18,000 in 2006, and indexed starting in 2007. You can check the effect on your federal and provincial taxes of various contribution amounts online at sites (www.taxtips.ca/calculators.htm#taxcalculator) and (www.morningstar.ca/globalhome/rrspcalculator/index.asp).
2. A tax shelter: Your investment income is not taxed while it remains in your RRSP. This allows your investment to grow faster. The protection continues if you switch to a registered retirement income fund (RRIF) at the age of 69 -- although you must make annual withdrawals each year that get larger each year as you approach 100. Eventually, the government does want its tax -- but you'll be paying it when your income, and thus tax rate, is lower.
3. Compound growth: At a return of eight per cent, an investor who contribute $100 a month for 40 years will make $48,000 in contributions, but their RRSPs will grow to $322,107, says Brian McCorquodale.
4. Disciplined savings: You can contribute up to $18,000 this year and unused contribution room can be carried forward. You can organize automatic regular contributions so you don't have to think about saving. These contributions can be as small as $25 weekly. There is less temptation to dip into savings because you will be taxed (unless you're using the plans intended to help you buy your first house or finance education). "When it's done automatically, systematically, the saving actually happens," says Geri Marone. "You don't have to worry about forgetting."
5. Home Buyers Plan: You can borrow from your RRSP for a downpayment on your first house if neither you nor your spouse has owned a house in the past five years. You each can withdraw up to $20,000 from your RRSPs, to be repaid over 15 years. "It's a great way to borrow from yourself," says Robin Quelhas, who took advantage of the plan himself. This is like paying yourself instead of a mortgage company, and it's enforced savings because any year you don't make the required payment, you have to include missed payments in your income.
6. Education: The Lifelong Learning Plan allows you to withdraw from your RRSP up to $10,000 per year to a maximum of $20,000 over four years to finance education and training. You have 10 years to repay the borrowed funds before tax penalties kick in. Although there is no tax deduction for contributions to a registered education savings plan, taxes are deferred on earnings from your contribution and that of the Canada Education Savings Grant in the plan until your children enter full-time post secondary education.
7. Early retirement: RRSPs can give you an income stream if you retire before you can collect from the Canada Pension Plan at age 60 and Old Age Security at 70, or reach the benefit age decreed by your employer's pension plan. "You can plan to save for the type of lifestyle you want after retirement," says Bob Tillman. You can plan and save so you have an adequate income stream to retire early, visit the grandkids often or take up an expensive hobby like travel or golf.
8. More comfortable retirement: RRSPs and RRIFs are your best hope to beat inflation over the long term as government and employers' pension plans are unlikely to keep up with increased living costs, even when indexed. As well, you can use spousal RRSPs to split income and lower your family tax burden (see No. 10). Stock investments have been "the only thing that has really beaten inflation and tax (increases) over time," says Bob Thompson.
9. Emergency Funds: If you or someone in your family needs emergency funds, you can tap into your savings. "We don't know what the future may hold for us. We may face huge health-care costs. Inflation could get bad," says Adrian Mastracci of KCM Wealth Management Inc. in Vancouver.
10. Spousal RRSPs: You can shift income from the higher-earning spouse to the spouse with the lower income, thus lowering the family tax rate. Two $40,000 incomes will be taxed at a lower rate (in Ontario, $7,073 each or $14,146 in total) than a $70,000 income and a $10,000 income ($16,590 and $275, or $16,865, total). Spousal RRSPs "are one of the few income-splitting, tax planning vehicles for the average employee," says Jack Courtney. |
