RSP's Did you know?

How am I Going to Retire?

Statistics suggest we will spend fewer years working than previous generations and that we anticipate longer, more active retirements. However, as retirement approaches you may rightly feel concerned about whether you have saved enough.

One couple in their late 40s – both income-earners who enjoyed their lifestyle - had been clients of mine for years before becoming concerned that they had not saved enough for retirement.

The first thing we did was prepare a detailed retirement analysis using BMO Nesbitt Burns sophisticated planning software. The results suggested that their dream of early retirement would not be possible unless some changes were made. We made some immediate investment decisions, and will continue to regularly review and update their investment portfolio and retirement plan.

The hardest part of retirement planning – determining what you want your retirement lifestyle to be – is often the most fun. This couple now looks forward to spending time at their cottage, golfing, and with their grandchildren. Once they knew where they wanted to be, it was a lot easier to plan how to get there.

RRSPs and RRIFs - Did You Know…?

You don't have to deduct your RRSP contribution in the year it is made. You can defer the deduction to a future year when your income may be higher than normal.

You can make a one-time $2,000 over-contribution to your RRSP without penalty.

You can contribute to an RRSP for your spouse or common-law partner, based on your contribution room, and deduct it on your tax return. This achieves income splitting which can reduce your family’s overall tax liability.

You don't have to wait for March 1, 2015 to make your 2014contribution – contribute today.

You can set up an automatic contribution plan for your RRSP.

You can contribute qualified investments you already own directly to your Self-Directed RRSP.

Provided you have unused RRSP room and are not over 71, you can continue to make an RRSP contribution for yourself – even if you are retired. If you are over 71, but your spouse or common-law partner is not, you can make a spousal contribution provided you have unused RRSP room.

The RRIF minimum withdrawal amount can be minimized if you have a younger spouse (or common-law partner).

The 2012 RRSP contribution deadline is March 1, 2015. The limit is 18% of earned income to a maximum, new RRSP contribution limit of $24,270 for 2014.

Make Your Money Work as Hard as You

An RRSP is one of the few remaining tax shelters available to Canadians. The benefits from investing in an RRSP can be substantial.

RRSP versus Non-RRSP Savings

Why does your money work so much harder in an RRSP? First, your contributions are tax-deductible. The following example shows the benefit of using an RRSP to save for retirement.

In our example, two individuals with earned income each have $5,000 to invest each year. Mary chooses to put her $5,000 in an RRSP and John chooses a non-RRSP investment. If we assume they are both in the 46% tax bracket, even though both investments earn 8% per year, after 25 years Mary has over $272,000 more money that John. The reason the RRSP investment came out so much further ahead is because the income tax is deferred on both the capital invested and the income earned.

Unfortunately for John who chooses to invest his $5000 outside the RRSP, his $5,000 must be taxed before it can be invested. That leaves him with only $2,700 to invest. In addition, all of the income his investment earns is taxed each year. Instead of earning 8%, the non-RRSP investor is earning only 4.32% after tax.

After 25 years, mary’s tax sheltered RRSP investment has grown to $394,772 while John’s non-RRSP investment has grown to only $122,488.

"Assumes a 46 per cent tax bracket; $5,000 invested annually in an RRSP at 8 per cent per annum; $2,700 after tax invested annually at 4.32 per cent per annum after tax. In both scenarios the return is comprised of 100% pure Interest.”

Concerned about saving enough for retirement? Make RRSPs the foundation of your savings program. Contact me to make your RRSP contribution, or to discuss how we can help you achieve your retirement goals.

Advantages of a Spousal RRSP

Spousal RRSPs make a lot of sense if there will be a significant difference between you and your spouse’s income in retirement. Here’s why:

Spousal RRSPs allow for income splitting in retirement.

Income splitting can reduce the total income tax you and your spouse pay by allowing you to have more equal incomes in retirement. With a lower taxable income, you may be able to avoid or at least minimize the clawback of Old Age Security benefits.

For example, a couple each earning $35,000 in retirement income will pay significantly less income tax and retain more of the OAS benefit than when one partner earns $70,000.

How a Spousal RRSP works

With a Spousal RRSP, the spouse who anticipates a higher retirement income uses his or her RRSP contribution room to make a contribution for the spouse with the lower expected retirement income. A Spousal RRSP is just like a regular RRSP except:

The plan is registered in your spouse's or common-law partner’s name.

You, as the contributing spouse, get a full tax deduction for contributions to the Spousal RRSP.

As with an RRSP, your contributions can’t exceed your personal RRSP contribution limit. You can use your RRSP contribution room to make a contribution to a Spousal RRSP, your own RRSP or split your contribution between the two plans.

A Spousal RRSP is an ideal way to make sure you and your partner have more equal incomes in retirement, lowering overall income tax and possibly retaining more of government benefits.

Contact me directly : Alex Kastanis (416) 224-2250 to make your RRSP contribution, or to discuss how we can help you achieve your retirement goals.

The comments contained herein are not intended to be a definitive analysis of tax or estate law, and are general in nature. Professional advice regarding an individual's particular tax position should be obtained.