{"id":289,"date":"2013-02-23T10:52:30","date_gmt":"2013-02-23T18:52:30","guid":{"rendered":"https:\/\/mgfadvisory.ca\/news\/?p=289"},"modified":"2018-08-23T10:52:58","modified_gmt":"2018-08-23T17:52:58","slug":"rrsp-tips-and-traps-part-2","status":"publish","type":"post","link":"https:\/\/mgfadvisory.ca\/news\/2013\/02\/23\/rrsp-tips-and-traps-part-2\/","title":{"rendered":"RRSP Tips and Traps \u2013 part 2"},"content":{"rendered":"
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Here is a continuation of my RRSP Tips and Traps blog.\u00a0 Part 1 dealt with the tax savings and deductions of RRSPs.\u00a0 Part 2 is a potpourri of other RRSP Tips and Traps.<\/p>\n

Savings for Retirement!?<\/strong><\/p>\n

In Part 1 of my RRSP blog, we discussed the tax savings elements of RRSPs.\u00a0 However a main reason RRSPs were created was to give us a mechanism to save for retirement, especially those of us we are not associated with any other retirement savings plans outside of government sponsored plans.\u00a0 We are taking some of our net worth and deciding not to spend or have fun with it today, but save it so that we can spend or have fun with it later!<\/p>\n

A recent CBC article suggests that Canadians are only saving 4% of their disposable income in RRSPs and TFSAs (http:\/\/www.cbc.ca\/news\/business\/taxseason\/story\/2013\/01\/02\/f-rrsp-2013-by-the-numbers.html<\/a>).\u00a0 As part of your retirement plan, you should consult with an advisor to assess what annual goals you should set towards reaching your retirement goals and needs.<\/p>\n

Monthly Contributions vs. Annual Contributions<\/strong><\/p>\n

The equity and fixed income markets have generally been a happy place over the past several months, but we have experienced quite a bit of turmoil over the past several years to make many of us doubters for investing in this space, or fearful of buying at the wrong time.\u00a0 One way to reduce this potential volatility of investing in these markets is to contribute monthly towards your annual RRSP goals.<\/p>\n

Contributing monthly means that over the course of a 12 month period, you have made 12 purchases.\u00a0 By definition, that is an average purchase price you have paid for your bundle of stocks, bonds and other investments.\u00a0 As it is an average, it will not be the highest price paid over the 12 month period, nor will it be the lowest price for that same period.\u00a0 It will be something in between those two book-ends.\u00a0 This is often referred to as \u201cdollar-cost averaging\u201d, and \u00a0has two clear benefits:\u00a0 1) it is a way to make your RRSP annual contributions easier to accomplish by breaking it up into smaller monthly contribution goals; and 2) it helps mitigate the risk of investing at an inopportune time by paying an average price for your investments versus an annual contribution strategy.<\/p>\n

I strongly recommend monthly contributions for all of my clients.<\/p>\n

RRSP vs. Mortgage Repayment<\/strong><\/p>\n

There are several good\u00a0RRSP versus Mortgage<\/em><\/strong>\u00a0repayment calculators available on Canadian bank and life insurance companies.\u00a0 I have one linked under my Planning Tools of my website if you are interested.\u00a0 The big picture is \u2013 do you have too much debt?\u00a0 If you do, pay off your debt first!<\/p>\n

What is too much debt?\u00a0 To me, it is when more than 33% of your disposable income is going towards debt interest and principal payments every month.\u00a0 It is also when your debt (mortgages, line of credits, credit cards, etc) represents more than 60% of your Total Assets.\u00a0 I call these two scenarios \u201chighly leveraged\u201d.\u00a0 Highly leveraged people are generally more susceptible to risk if something happens to them for illness, job loss or other unplanned event (major house repair required).\u00a0 The best way to pre-plan for highly leveraged people is to ensure that they have adequate insurance coverage for \u201cwhat-if\u201d situations, and to strategically targeted early repayment of your debts.<\/p>\n

Many people will prefer to do an RRSP contribution, and use the tax refund to repay debts.\u00a0 This way, they tackle both goals.\u00a0 Generally I like this strategy, but in some cases I would prefer a direct target to debt repayment in lieu of any RRSP contributions when that person is highly leveraged.<\/p>\n

RRSP vs. TFSA<\/strong><\/p>\n

Again, there are several calculators available for comparing an RRSP versus a Tax Free Savings Account (\u201cTFSA\u201d).\u00a0\u00a0 My general comments on the topic are as follows: \u00a0I currently prefer using an RRSP for retirement savings and a TFSA for a source of emergency funds.<\/p>\n

What do I mean for emergency funds?\u00a0 Every healthy personal financial plan has an asset that is preserved for emergency purposes.\u00a0 Emergencies are those things that we do not plan to happen, but if they do they impact our cash flow and our financial and retirement plans.\u00a0 Emergencies I\u2019m referring to include a long-term illness, an injury, loss of job, or an unforeseen repair needed for the house, as examples.<\/p>\n

Financial planners will recommend you maintain 3-6 months of your monthly disposable cash flow needs in an emergency fund.\u00a0 The emergency fund should be invested in a conservative and liquid investment, as you never know when you may need to access it.\u00a0 As a consequence many people will invest their emergency fund in interest-producing investments (e.g. GICs, bank deposits, shorter-term bond or fixed income funds).<\/p>\n

A TFSA, in my opinion, is currently a good place for an emergency fund because:\u00a0 1) any interest income is not subject to taxation, 2) TFSAs can be withdrawn without any tax consequences, and 3) you can re-contribute to a TFSA for any contribution you made in the past and then withdrew for emergency purposes.<\/p>\n

For more information on TFSAs, check out the Canada Revenue Agency website at:\u00a0\u00a0http:\/\/www.cra-arc.gc.ca\/tx\/ndvdls\/tpcs\/tfsa-celi\/menu-eng.html<\/a>.<\/p>\n

Home Buyers and Lifelong Learning Plans<\/strong><\/p>\n

RRSPs have two programs that allow you to withdraw from the RRSP without immediate tax consequences: 1) Home Buyers Plan; and \u00a02) Lifelong Learning Plan.\u00a0 I won\u2019t go into further details in this blog, instead you can refer to the Canada Revenue Agency link below for further information on both programs.<\/p>\n

Home Buyers Plan \u2013\u00a0http:\/\/www.cra-arc.gc.ca\/tx\/ndvdls\/tpcs\/rrsp-reer\/hbp-rap\/menu-eng.html<\/a><\/p>\n

Lifelong Learning Plan \u2013\u00a0http:\/\/www.cra-arc.gc.ca\/tx\/ndvdls\/tpcs\/rrsp-reer\/llp-reep\/menu-eng.html<\/a><\/p>\n

My only comment here is this \u2013 if you are interested in using either of these programs from your RRSP, then please ensure that your investments in your RRSP are appropriate. \u00a0\u00a0You shouldn\u2019t, for example, invest in long-term higher-risk investments requiring 10 year investment horizons when you plan to utilize these plans in the next 2-5 years.\u00a0 Your advisor needs to be aware of your intention towards using these\u00a0 plans, and then needs to build an investment strategy that is appropriate.<\/p>\n

If you have any questions, send me a message at\u00a0marco@mgfadvisory.ca<\/a>.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"  Here is a continuation of my RRSP Tips and Traps blog.\u00a0 Part 1 dealt with the tax savings and deductions of RRSPs.\u00a0 Part 2 is a potpourri of other RRSP Tips and Traps. Savings for Retirement!? In Part 1 of my RRSP blog, we discussed the tax savings elements of RRSPs.\u00a0 However a main…

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