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Money Management Newsletter: RSP
Planning Seasonal RRSP advertisements will be emerging in the media very soon The RRSP seasonal advertisements will be emerging in the media very soon, reminding us to save for retirement. But has your cash flow slowed to a cash drip? Looks like you won't be able to make your maximum RRSP contribution this tax year: just like last year… and the year before… and the year before that. According to Statistics Canada, in the 2002 tax year Canadians took advantage of only 9 per cent of the nearly $274 billion in available contribution room. That means a whole lot of room for RRSP growth went unfilled – 'empty' contribution space that will ultimately reduce the retirement income of millions of Canadians by billions of dollars. Don't be resigned to believing that its too far in the future to worry about now or that saving a smaller amounts don't add up to much… Say, you're 25 years old and invest $2,000 each year until aged 65 (compounding annually at 5%) your savings will grow to a whopping $255.000. Making the investment $4,000 per annum totals 1/2 a million at 65. That's about 80 dollars a week, you'd have to save! This link travels you to an example using our Advantages of Early Investing calculator. It illustrating 3 savings plans scenarios, all using the $2,000 per year but starting at different ages. It shows age 25, as above and 35 and age 45. Starting a little later still shows the magic of compounding while not taking too much out of your paycheck. It's easy to change the numbers to suit your situation, and provides interesting results. Most investment management companies have automatic withdrawal plans linked to a mutual fund portfolio, so stashing away a few hundred each month is easy. For more info on how a Fiscal Agents advisor can help, complete this contact form. Borrowing to maximize your RRSP contribution can be smart, especially with interest rates at historical low levels. Let's say you need to borrow $10,000 to reach your maximum contribution limit. If $10,000 is invested at an annual compounded rate of return of 8% (8% is a standard rate of return associated with illustrations involving equity type investments (2003)), it could be worth over $100,500 before tax in 30 years. On the other hand, If the interest rate on borrowing $10,000 for one year is 5%, and you pay off the loan in 12 monthly payments your total interest cost will be just $273. Meanwhile, the proceeds from the loan are busily earning tax-sheltered investment growth inside your RRSP. For some finding an extra $10,000. is a dream, however as mentioned before, a few thousand dollars per year adds up to a nice nestegg. Paying the RRSP loan off in a short period may be a condition of the loan, however, borrowing to maximize your RRSP contributions may be a smart move – but you should also follow these tips:
Editors Caveat: Not everybody should save money inside an RRSP. Lower income earners can be led astray by believing an RRSP savings plan will help their retirement situations. Richard Shillington is a statistician who specializes in the quantitative analysis of health, social and economic policy and writes: Illustrating how this unfairness works in practice [Lower income earners are affected], let's compare three retirement savings strategies. Each starts with $1,000 at age 45. The three investments are, first, inside an RRSP (the tax refund is also invested); second, outside an RRSP in GICs; and third, outside an RRSP in stocks (which earn some dividends and some capital gains). The funds each earn 5 per cent per year but are taxed at different rates. At 65, the RRSP has grown to $3,538, significantly more than the funds invested outside an RRSP, which are $2,088 and $2,380 respectively. But the money in the RRSP is trapped. Any funds withdrawn are subject to taxation and affect eligibility for income supports like the GIS, the rent in social housing, prescription drugs, nursing- home fees and the cost of meals on wheels and home care. In extreme cases, withdrawing $1,000 from an RRSP can cost you more than $1,000 in supports (so, in effect, your tax rate exceeds 100 per cent). Editors note: This example does not mention the marginal tax rate used on the breakdown of the stock return. It does illustrate however that the sheltered return of an RRSP may not be the best option for people with low income retirement expectations.
With files from NC and IG Financial Services
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, Fiscal Agents Money Management Newsletter
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