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The Best & Worst Time To Make an RRSP Withdrawal

Withdrawing from an RRSP can be an extremely expensive option due to the tax consequences. So, unless you are saving for retirement within your RRSP, or you are planning on taking advantage of the Lifelong Learning Plan or the First Time Home Buyer’s Plan, I would not recommend saving within an RRSP investment vehicle.

To illustrate this, suppose you are 25 years old and you have managed to save $5000 in your RRSP. You end up spending too much money over Christmas and find it impossible to keep up with all your bills. You decide to withdraw $2000 from your RRSP.

By doing so, you have lost $2000 worth of RRSP contribution room. You can never get this contribution room back.

As well, you will be subject to a withholding tax of 10% in all provinces (except Quebec where you would have to pay 21%) that would be taken off the top and sent to the government. So, even though you are withdrawing $2000, you would only get $1800 at the end of the day or even less in Quebec.

You will also need to add the full $2000 to your income for the current tax year, and then depending on your income tax bracket, you will likely have to pay more tax at the end of the year unless you deliberately make an RRSP contribution to offset the withdrawal.

February 25, 2010

Investing

Should I Contribute to an RRSP or a TFSA?

With the introduction of the Tax Free Savings Account (TFSA) in January 2009, Canadians now have another investment vehicle option to save for retirement. Whereas before, most people took advantage of the immediate tax deduction for contributing into a Registered Retirement Savings Plan (RRSP), now they have to consider what will be most beneficial to them in the long run. With the RRSP contribution deadline for 2009 fast approaching, it’s important for Canadians to make this decision ASAP.

What are the advantages of contributing to a TFSA?

Although you don’t receive an income tax deduction for contributing into a TFSA, there are some important advantages to consider. All earnings within a TFSA are not taxable, whereas with an RRSP, earnings are tax deferred, but when funds are withdrawn, they are fully taxable.

A second advantage is that there are no expensive tax implications when you withdraw from a TFSA. Since you’ve already paid tax on the money you contribute to a TFSA, when you withdraw the funds it is not a taxable event. By contrast, if you withdraw from an RRSP, not only are you subject to an immediate withholding tax, you also have to add the amount withdrawn to your income for the year and you may end up paying more tax when it is time to fill out your tax forms or prepare your online taxes this year.

February 9, 2010

Investing

RRSP Retirement Savings Tips for 2010

1. Start contributing today into your RRSP for the 2010 tax year rather than waiting until the last minute to contribute. If you can’t afford a lump sum contribution, start up a preauthorized contribution that comes directly out of your bank account on the same day that you get your paycheck. By investing regularly throughout the year instead of contributing a lump sum at the RRSP deadline, your money will have more of a chance to grow for you, and will significantly impact your returns over the long term.

2. If you think you will earn more money in future years, consider deferring your tax deductions until a later tax year. Just because you contribute in 2010, it doesn’t mean that you have to benefit from the tax deduction in 2010. Save it for a year that you expect your marginal tax rate to be much higher. For instance, full time students with part time jobs who want to start saving for retirement, will likely benefit from deferring their tax deductions.

3. Take advantage of a spousal RRSP if you expect your spouse’s income to be lower than yours when you reach retirement age. By splitting your income it will result in a lower tax bill in the future.

February 5, 2010

Investing

Save Money On Your Taxes– Use A Spousal RRSP

If you anticipate that your spouse’s income will be considerably lower than your own during retirement, a great way to save money on your tax bill is to take advantage of a Spousal RRSP. It’s a simple and strategic way to split your income.

How does a Spousal RRSP work?

The higher income-earning spouse contributes to the Spousal RRSP and gets to claim the tax deduction. The money in the plan then accumulates free of tax until it is withdrawn by the other spouse (the lower income earner), which will result in tax savings.

What you should know about Spousal RRSPs:

If you are the plan owner and your spouse is contributing into your Spousal RRSP, if you withdraw money from the plan, any money contributed in the last 2 calendar years as well as the current year will impact your spouse’s taxes. In other words, your spouse’s taxes will end up being impacted. So, it would not be advisable to start up an RRSP unless you are certain you won’t have to withdraw the funds in the short term. (Before investing in an RRSP, it’s important to have an emergency savings account set up so that in the event of an unexpected expense, you wouldn’t be depending on RRSP money.)

February 3, 2010

Investing

Using The First Time Home Buyer’s Plan For A Home Down Payment

What Is The First Time Home Buyer’s Plan?

If you are planning on buying or building your first home and you want to use money from your Registered Retirement Savings Plan (RRSP) to use for your down payment and other house expenses, instead of making a regular withdrawal and facing the tax consequences, you can take advantage of the First Time Home Buyer’s Plan (HBP). When you take advantage of the HBP, what you are essentially doing is borrowing money from yourself that will eventually need to be paid back into your RRSP.

Who is eligible?

In order to be eligible, you must enter into a written agreement to buy or build a home. The home must be your principal place of residence, and you must be a Canadian resident. The most you can withdraw is $25,000, and you can either withdraw it all at once, or you can make a series of withdrawals throughout the same year. If you plan on buying a house with your spouse, your spouse can also take advantage of the HBP.

January 26, 2010

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