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By Dale Jackson
Globe and Mail
Report on Business
Wednesday, February 7, 2007
RRSP season is in full swing and that means all-out war for the mutual fund companies vying to get your contribution before the March 1 deadline. And like the saying goes, the first casualty of war is the truth. That's not to say all those slick advertising campaigns are lies -- it's what isn't said that could set you on the wrong path. Before making that final decision here are 10 popular RRSP myths:
Adrian Mastracci, fee-only portfolio manager at
KCM Wealth Management in Vancouver, says, "If energy does well, you do well. If it does poorly -- as it has -- you do poorly."
1. Registered retirement savings plans are a tax exemption.
That's wrong. RRSPs are tax deferrals and there's a huge difference, according to Mintz & Partners tax partner Lorn Kutner.
"An exemption is forever. A deferral means you will have to pay tax at some point in the future," he says. An RRSP is a temporary tax shelter that allows the plan holder to delay paying taxes on contributions until the money is withdrawn. RRSPs are popular because they allow savings to grow tax free until the plan holder is in a lower tax bracket -- normally retirement.
2. You should contribute the maximum allowable amount.
Not always. You can contribute to your RRSP until Dec. 31 of the year you turn 69. At that time the plan must be converted to a registered retirement income fund (RRIF) and the plan holder must withdraw a minimum amount each year.
If that amount is too high, the government could claw back your Old Age Security benefits. Claw-backs can be avoided by income splitting where taxable income is split with a lower-income spouse.
In many cases investors would be best off contributing as much as they can and using the rest to pay off debt -- from a credit card balance to a mortgage.
This time of year banks push RRSP loans. They work out well for the banks because they get your business on the bank side as well as their investment arm, but for many it's just another debt trap.
There's also a strong argument for young investors to delay making RRSP contributions until they are in their higher income years and the tax savings are bigger. The trade off would be less time to allow savings to grow tax-free.
3. You must take advantage of your maximum allowable contribution the year it is issued.
Wrong. The difference between the allowable amount and what you contribute can be used in later years. "You can carry forward any amount you want," Mr. Kutner says.
4. You can only hold mutual funds offered by the financial institution that administers your RRSP.
There are two popular misconceptions in that statement.
First, banks often offer prepackaged portfolios containing their own funds. But most banks also have an investment arm that offers self-directed RRSPs that provide a wide range of securities from several financial institutions.
Second, just about any security is RRSP eligible -- stocks, bonds, exchange-traded funds, guaranteed investment certificates, T-bills, mutual funds and even bullion or good old cash.
5. There are limits on how many foreign securities are allowed in an RRSP.
Not any more. Two years ago Ottawa lifted foreign content limits, yet Canadians remain heavily weighted toward Canadian equities -- most likely because the vast majority of Canadian equities are bank and energy stocks and they have been performing well lately.
"It's just too concentrated" says Adrian Mastracci, president of Vancouver-based KCM Wealth Management. "If energy does well, you do well. If it does poorly -- as it has -- you do poorly." To properly diversify a portfolio and lower overall risk, Mr. Mastracci suggests a portfolio weighting of 20 to 30 per cent Canadian securities.
6. You cannot make a withdrawal from your RRSP until you retire.
Not true. Money from an RRSP is available to the plan holder at any time, but it's important to know it will be taxed at the going rate. The government allows exemptions such as the Home Buyer's Plan, where the plan holder and spouse can each borrow up to $20,000 provided the funds have been on deposit at least 90 days. Repayment must begin no more than two years later, with at least 1/15 of the funds paid back each year. The offer is only available to first-time home buyers. The Lifelong Learning Plan also allows investors to withdraw up to $20,000 tax free for full-time training or post-secondary education. The full amount must be paid back within 10 years.
7. An RRSP can be used to back up a loan.
Wrong. Lending institutions do not consider an RRSP collateral for borrowed money.
8. Interest on RRSP loans is tax deductible.
Sorry -- only interest on non-RRSP investment loans is tax deductible.
9. Any contribution over the maximum allowable amount does not qualify for a tax rebate.
There is a lifetime allowance of $2,000 for overcontributions if you contribute too much in one year. The extra amount must be used before any new contributions are applied.
10. If a plan holder dies, the proceeds of an RRSP are subject to taxation.
Not if the beneficiary is the surviving spouse and the funds are transferred into his or her RRSP or RRIF. If there is no surviving spouse -- in most cases -- RRSP holdings are taxed on the deceased's final tax return and distributed to whoever is named as the beneficiary or to the holder's estate.
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