By Amy Fendley It’s nearing the end of the month, and if you haven’t been thinking RRSPs, maybe you should be. This week is your last chance to make your 1998 RRSP contribution, and you might even think about making your 1999 RRSP contribution now, instead of waiting until the beginning of 2000. The tax-free accumulation of income for the 12-month period compounded over the life of the plan could amount to significant additional retirement funds. A tap on the shoulder and some helpful hints from financial advisor, Maureen Donovan, of the Donovan Financial Group, are for those of you who may not have been thinking RRSP. How is an RRSP better than a savings account? o An RRSP is better than a savings account for two reasons: On your income tax return, you may deduct the amount of your RRSP contribution from your income; thereby reducing your taxable income and reducing your tax for that year. Also, the money in your RRSP will earn income which is added to the value of your RRSP. You do not pay tax on those earnings. Money in your savings account earns interest and you pay tax on every last cent. Why should I have an RRSP? o Almost everyone benefits from an RRSP. Even if you have a pension plan at work, it may not be enough to provide you with a comfortable income after retirement. Some feel that the Canada Pension Plan is not secure and at approximately $400 per month, the Old Age Pension is hardly enough to get by on. Also, who’s going to pay for your retirement ski or golf excursions? The average life expectancy has risen to 81 for females and 74 for males and that’s based on five year old statistics. Another good reason is to minimize your debt. One of the key ingredients in realizing the benefits of an RRSP is time. An RRSP needs time to grow, and will compound tax free. The serious mistake is starting too late in life. If you ever have a period of time without any income due to illness, strike, work shortage or whatever reason, you can cash in RRSPs and use that money to get by. Is an RRSP a way to avoid paying tax? o Yes and no. When you make the contribution and take the tax deduction, you save tax. When you take money out of your RRSP, you must pay tax on whatever amount you withdrew. You immediately get a tax break when you claim a tax deduction on your tax return, and when you’re in your "earning years," you may be in a higher tax bracket than you will be after you retire. How fast will my RRSP grow? o This depends on where the money is. As with any other investment, if you want to try for extra fast growth, you must sacrifice security, and vice versa. There are a vast number of funds available, the difficulty is choosing one which suits your needs. If you are "young," an RRSP will have time to recover from bad times, so it is advisable to get into an equity fund which means your money will be pooled with that of others and the money will be invested in shares of corporations. If you are "older" and do not have time to watch your RRSP recover from bad times, the steady growth of an RRSP similar to a guaranteed investment certificate, may be the way to go. Should I get an RRSP or a Mutual Fund? o You can invest in a Mutual Fund either "in" your RRSP or "outside" your RRSP. Any income earned by your investments outside your RRSP will, of course, be taxable income. Interest earned outside the RRSP will be taxed at your "marginal rate" which means that if your income is in the $30,000 to $60,000 range, the government will take close to $40 on every $100 you earn in interest income. Dividend income is taxed at a lower rate. Capital gains are also taxed lower because you report them only as income. "Ethical funds" are funds which hold specific ethical philosophies, such as the environment. Before investing your money in this type of fund, it is wise to ask yourself what ethical means to you, as in many cases it is difficult to track the subsidiaries of these funds. Can the money in an RRSP be insured? o If your RRSP is similar to a GIC it may qualify. The fund may be insured by the CDIC (Canada Deposit Insurance Corporation). If the term of the deposit exceeds five years, it cannot be insured. Funds which invest in "equity funds" can’t be covered because of the fluctuating stock market. If you ask a financial advisor whether or not a certain fund is covered by the CDIC, the advisor must, by law, refuse to answer the question. All the advisor may do is hand you a brochure from the CDIC and ask you to find the name of the fund or company as being a member in that brochure. How much may I put into my RRSP? o The amount you may deduct on your income tax return is indicated on the Assessment Notice which you get back from Revenue Canada after you file a tax return. When you file your tax return for 1998, you will get back an Assessment Notice for than return. On it, you will find a notice to you indicating the maximum amount you are able to deduct on your tax return for 1999. The amount will be determined by the figures on your return from 1998. You may contribute more than that amount, but the limit as shown is all you may deduct. If your contributions exceed that limit by more than $2,000 you may be hit with penalties. What does age have to do with my RRSP? o You cannot contribute to your own RRSP after the end of the year in which you turn 69. And you must convert your RRSPs to retirement income by the end of the following year. There is no minimum age limit. Young persons who are not taxable, should, if they have earned income, file tax returns in order to establish RRSP "deduction room." Should I borrow to buy an RRSP? o Financial advisors generally agree that if you can pay back the loan within a year, you will probably be far ahead to borrow for your RRSP. And the resulting increase in your tax refund may go a long way to paying back the loan. Although Donovan warns, "get advice from your bank or financial adviser, every individual is different."
