7 misconceptions about RRSPs RRSPs have been around for almost 60 years but there are still plenty of misconceptions about them. Among them: Do you really need one? by Adam Mayers Source: insidebrockville As RRSP season gets into full swing, every financial institution you’ve ever walked past is suddenly your best friend. Don’t delay, make a contribution today! There’s no question that Registered Retirement Savings Plans are a good idea. As we live longer and as fewer among us can count on company pensions, personal saving has to fill the gaps. Author, investment expert and Star columnist Gordon Pape calls RRSPs the “ultimate wealth builder,” using that phrase as the title of a book. But even though they’ve been around for almost 60 years, there are plenty of misconceptions about RRSPs. Myth #1: RRSPs are tax-free: Contributions give you a tax refund of up to 40 per cent, depending on your tax bracket. But many people forget that you repay the tax when you draw down the money. If you dip into your RRSP (generally a bad idea) before you turn 71, here’s what happens: • If you withdraw $5,000 or less, you’ll pay a 10 per cent withholding tax, so you get $4,500 in hand; • If you withdraw more than $5,000 but less than $15,000, the tax withheld is 20 per cent; • If you withdraw more than $15,000, the tax is 30 per cent. And more tax may be payable because the money counts as income in the year you withdraw it. In the year you turn 71, your RRSP must be converted into a Registered Retirement Income Fund (RRIF) because the government wants its money back, setting minimum annual withdrawal limits starting at 7.38 per cent in the first year and rising to 20 per cent a year at age 94 and beyond. That too, is considered income for tax purposes. Myth #2: Most Canadians have an RRSP: About 60 per cent of us have opened an RRSP, but according to Canada Revenue Agency, some 94 per cent of the available room is unused. Higher-income earners tend to contribute most because they have more money to shelter and more tax to pay. Carleton University business professor Ian Lee believes one reason for the large amount of unused room is that young families make a shrewd choice between real estate and retirement. Since they don’t have the money for both, they opt for the house. Myth # 3: Always max out the contribution: If you have a lot of debt at high rates of interest, it is a better idea to pay that off. Credit cards carry annual rates of 19.99 per cent, while you may earn 4 or 5 per cent inside your RRSP. Or pay down your mortgage. At these low rates, a little reduces a lot of principle, cutting interest costs over time. Myth #4: An RRSP loan is a good idea: For many people, probably not. If you were disciplined throughout the year and made regular payments, you shouldn’t need to borrow money. If you weren’t disciplined, are you likely to repay the loan with your refund? Try a payroll deduction instead. It’s easy and painless. Money you don’t see is money you don’t miss. Myth #5: Always aim for the Feb. 28 deadline: That’s not a good idea, though it’s better than nothing at all. Most people don’t have the full amount lying around, and those who contribute at the deadline also miss an entire year of tax-free growth. Myth #6:An RRSP is a pension: An RRSP is just a pile of money (hopefully a big one). That’s where the stress comes in for many people. You have to manage it. A defined benefit pension plan gives you a monthly payment for life. You don’t have to worry about it. An RRSP must be invested in something to create the monthly payment. Myth #7: RRSPs are better than TFSAs: For young people who are saving for a home, a Tax Free Savings Account may be better. It’s easier to get at the money and the amount inside grows tax-free. For low-income earners, a TFSA may also be better, because the income in a TFSA isn’t counted for tax purposes and so doesn’t affect such things as the means-tested Guaranteed Income Supplement (GIS). For seniors, a TFSA may also a better place to shelter money. In the end, an RRSP is a terrific way to save and can play a key role in your retirement planning. But as with all things to do with personal finance, one size doesn’t fit all. Sometimes other things come first.
Posted on: Wed, 21 Jan 2015 12:53:26 +0000
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