Your
RRSP Questions Answered
If I'm short of money, does it make sense
to borrow to contribute?
One single $2,000 contribution to an RRSP, made at age 25, at 8%
annual rate of interest, would be worth $59,000 at age 69. Every
year you miss the opportunity to invest, you have less time to make
deposits and appreciate compound earnings. If you borrow your contribution
and repay the loan within a year, interest payable will be far less
than the tax you save by deducting the contribution.
Can I deduct the interest
on the loan, as with any other non-RRSP investment?
No. If you are investing outside of an RRSP you can deduct interest
because it is viewed somewhat like a business expense as you seek
to gain a profit. When you invest in an RRSP, the loan is allowing
you to get a much better tax break---a full deduction on the investment
and ongoing tax deferral on the investment income.
What if I didn't maximize my RRSP last
year?
If you do not maximize your RRSP contribution in any given year,
the unused portion is automatically carried forward to be used in
subsequent years.
Is it safer to invest in GICs in your
RRSP?
Low interest rates on GICs may not achieve the after-inflation growth
necessary to provide you with enough retirement capital on which
to live. Taking no risk at all may not safeguard your future security.
Select investments that will help you stay ahead of inflation while
meeting your combined objectives in relation to: the safety of the
principal, growth, liquidity, and of course future retirement income.
How much do I need to invest in an RRSP?
This year the maximum allowed contribution is 18% of your 1998 earned
income to a maximum of $13,500 minus any pension adjustment you
may have through membership in a company pension plan. Maximizing
makes a lot of sense when you consider that people are living in
retirement for as long as 25 years. In most cases retirees will
need well over $1 million just to provide an average income.
How much can I over-contribute?
If you have a year when you have lots of extra cash to invest, you
can over-contribute up to, but not in excess of $2,000. You can
take the tax deduction in a later year, but you will get the benefit
of ongoing tax deferral within the RRSP from the beginning.
What is more important, paying off my
mortgage or investing in an RRSP?
Both contributing to an RRSP and accumulating equity in a home,
will contribute to your net worth and fiscal security, and both
are worthwhile goals. When you make your RRSP contribution, you
will get a tax break as high as half of your contribution, depending
on your Marginal Tax Rate. Over time, RRSP holdings could well exceed
the value of your home. For example: If you invested $10,000 in
an RRSP over 20 years, that's $200,000 capital invested. If you
are in a 50% tax bracket you could get about $100,000 of that principal
back via deductions over the contributing years to pay down the
mortgage year by year--in this case, about a $5,000 tax refund per
year. Factor in the deferred growth on the RRSP investment at 8%
per annum interest and your net worth really begins to grow. In
this case your RRSP would be worth over $500,000 after 20 years.
Why should I use a Spousal RRSP?
Spousal RRSP contributions allow income splitting. If you make a
spousal RRSP contribution, you claim the RRSP deduction on your
tax return, even though your spouse is the annuitant. Your spouse
will report the income for tax purposes when the funds are withdrawn
(as long as certain conditions are met). If your spouse has less
income than you at the time the funds are withdrawn (at retirement
or even earlier), this strategy can result in significantly less
tax to your family.
Would I lose the money held in a spousal
RRSP if we split up?
As far as any future separation or divorce, you will probably have
to divide both spouses' personally owned RRSPs, pensions, and any
other assets anyway. So you might as well utilize a spousal RRSP
for the potential tax break.
Can I withdraw money from my RRSP?
Subject to the terms of the investment you choose, you can withdraw
your money. It will be subject to tax, and you will not have any
more potential for ongoing tax deferral on that amount. When you
withdraw funds from your RRSP, a tax will be withheld by the institution
as a deposit on your taxes due on the RRSP withdrawal. Taxes are
not withheld if you are directly transferring from one RRSP investment
vehicle to another.
What happens to my RRSP assets when
I die?
Your RRSP can simply be transferred via a rollover to a surviving
spouse's existing or new RRSP without tax penalty. To achieve the
transfer on a tax-deferred basis, direct the transfer using a Designation
of Beneficiary or by your will. The RRSP money can be transferred
to an annuity for a financially dependent child or grandchild under
age 18 to provide benefits payable to age 18. RRSPs can also be
transferred to an adult child who is dependent on you as a result
of a mental or physical infirmity. Otherwise, your RRSP will be
considered cashed the day you die, and be fully taxable in your
final tax return (in most cases, up to 50% tax). In most provinces
you can specify your beneficiary in your RRSP agreement or your
will.
Why does my estate need to pay up to
50% tax on my remaining RRSP capital?
This is fair because you get a deduction against your taxable income
every year you contribute and defer taxation of investment income
until you withdraw funds (ask your advisor about how RRSP funds
can be withdrawn). You can pre-fund the equivalent amount of capital
lost to taxation by using life insurance. Such policies can often
be purchased for as low as 1% of the value of your RRSP holdings.
