101 RRSP Questions… Well, 3 anyway!
It’s the height of RRSP season and everywhere I go people are asking RRSP questions. For our American cousins, an RRSP is like your 401K… it’s a retirement savings plan.
One woman wrote to say she’s expecting a pretty hefty bonus in a couple of years, and her financial advisor has told her to hold off on making contributions to her retirement savings so she can save up her contribution room for when she gets her bonus, reducing her tax then. But since she’s saving enough to max out her RRSP, and she has no consumer debt, she’s of two minds. Hmm.
I’m with you, chick. I don’t understand why your advisor would tell you to save the room now if you would benefit from the tax deduction now. If you wouldn’t, you could still put the money in the RRSP based on your current contribution level, get the money earning a tax-deferred return, and claim the deduction when your marginal tax rate is higher - say, when you get the bonus. The problem I have with the advice you receive is that it completely ignores the fact that the compounding return is the true magic of contributing to a retirement plan of any kind. Without knowing more such as what your current income is, and what the amount of your bonus will be, I can’t add any more.
Marijke wrote that she has heard that paying down a mortgage a little every year helps more than purchasing RRSPs and wants to know if this true. Her issue is further complicated by the fact that she wants to make sure her money isn’t “tied up” in case she needs it for an emergency.
Marijke asks two questions that I get all the time. The first question about paying down the mortgage versus contributing to an RRSP, is easy: do both. Contribute as much as you can to your RRSP and then take your tax refund and use that as a principal prepayment against your mortgage. See, who says you can’t have your cake and eat it too?
The second question is also one that swims around in lots of people’s minds: how to balance short term needs (for an emergency fund, for example) with long term needs for saving. The answer to this question is exactly the same as for the first question: do both. You need an emergency fund. But you also need to do some long term planning. If you don’t, then you’ll just end up OLD and POOR! Yuck!
Another question I get often is this: does it make sense to take the money out of my RRSP to pay down debt. The answer is NO, NO, NO, NO, NO, NO, NO. The tax implications of deregistering the RRSP are too frightening to even think about. I know people who have taken money out of their RRSPs and they are NEVER prepared for the amount of tax they will have to pay on those withdrawals. Of course, if you have unregistered investments - mutual funds, GICs, and the like that are not in an RRSP - and expensive consumer debt, then it makes sense to sell those investments and pay off the debt. Then rebuild your investments. Take the money you would have used monthly for debt repayment and start an automatic investment plan.
A lot of people have been asking about the office in a box and how to get financially organized. Go and read Gail’s 12 Steps to Getting Organized Financially. As for what goes into the office in a box, you should decide that based on what you think you will use. Just take a walk down the aisle of your local business supply store and make a list, price it out, and then budget for it.
February 15th, 2008 at 11:39 am
I’ve been watching RRSP statements from investment advisor my family uses and have been disappointed with losses each and every month. When questions are presented to the individual ‘looking’ after my money, the answer remains the same ‘you are lucky you only lost $ when many other people are losing much more’. That answer has not satisfied us and we are currently reviewing our options and have a few options. One is a stock market GIC that is provided by CIBC and the other is a GIC offered through Canadian Western Bank. Canadian Western Bank offers 4.65% for a 5 year term; CIBC offers a 70/30% split of the profit (70% to the customer; 30% to the bank) and does not guarantee a rate of return until the date of maturity of the investment. My family would have maturity dates laddered so that each 3 years an investment product would com due. Gail, what are your thoughts on the stock market GIC?