My Own Advisor

A few weeks ago on a flight, I read an article in The Globe and Mail entitled Four experts offer their RRSP game plans.   The premise of the article was to disclose the RRSPs of four certified financial planners; strategies that Canadian investors might consider for their own portfolios.  To be honest, I was a little surprised by the personal strategies of some of these financial planners.  Maybe that’s why personal finance is personal.

In any event let’s review what they told us (in quotes from the article) with my questions and comments for these planners that follow (in italics).  Maybe you have some questions for them as well?

Profile # 1 – Mark Coutts, President, Coutts Financial Services Inc.

is “…almost exclusively mutual-fund based in this portfolio….”

Mark Coutts, why mostly mutual funds in your portfolio?  In the article you highlighted the CI Signature High Income Fund (with a management expense ratio of 1.60%).  I don’t dispute this has been a star performer since inception (9.83% return) but out of the thousands of mutual funds Canadian investors have available to them, who could have selected this one and foreseen that success?

Profile # 2 – Teresa Black Hughes, Financial Advisor, Rogers Group Financial

“Working with a financial adviser, she has added some U.S. stocks that now account for about 20 per cent of the equity portion, with 20 per cent from Canada (including some exchange-traded fund), 10 per cent in emerging markets (especially in Asia) and 10 per cent in gold and precious metals mutual funds.”

Teresa, why work with another financial advisor?  Maybe for unbiased help?  Also, I wonder if you’d advise most Canadians to hold 10% in precious metals?

Profile # 3 – Dean Owen, Partner, Cherry Financial Services Inc.

“70 per cent equities (mostly segregated funds and some mutual funds); 5 to 10 per cent fixed income and the balance in real estate funds.”

Dean, why hold segregated funds at all?  These are high-prices products.

Profile # 4 – Susan St. Amand, President and founder, Sirius Financial Services

“She holds no equity mutual funds, preferring to work with her adviser in selecting a diverse mix of stocks, including dividend-producing banks stocks, to achieve her goal of an annual return of 6 per cent, including inflation.”

Susan, like my question to Teresa, why work with another financial advisor?  For unbiased help?  Also, why keep your dividend-paying bank stocks in your RRSP?  (You are investing in a tax-advantaged securities in a tax-deferred account).

I wouldn’t necessarily follow some of these strategies above which is why personal finance should be tailored to the individual; as defined by their financial plan.  Maybe that’s the hidden message here from the experts all along.

I’m sure some experts would not agree with my portfolio, holding broad-market Exchange Traded Funds (ETFs) and mainly U.S. stocks in my RRSP.  Or would they?

Do you have any thoughts on the RRSP strategies of these experts?  What do you agree with or disagree with?  I look forward to your comments including any comments from the CFPs to share more details about their strategies with me.

Oh yes, before I forget I have another H&R Block Canada online tax program point of purchase code to giveaway.  This is draw # 2.  You can always start this online tax program for free but you need to pay for this service if you want to file your tax return.  If you win my giveaway though you don’t have to worry about making this payment – you get a point of purchase code from yours truly – which is up to a $30 value.

Enter the draw using the options below and good luck!

a Rafflecopter giveaway

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There is no shortage of blogposts and media articles about which account is better for retirement purposes:  the Registered Retirement Savings Plan (RRSP) or the Tax Free Savings Account (TFSA).  I’ve got my preference for which account I focus on for retirement purposes but let’s recap some key points about each plan first:

RRSP	TFSA
A tax-deferral plan.	A tax-free plan.
Contributions can be made with “before-tax” dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution.	Contributions are made with “after-tax” dollars.
Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate.	Contributions are not tax deductible; there is no refund to be had.
If you don’t contribute your maximum allowable amount in any given year you can carry forward contribution room, up to your limit.
If you make a withdrawal, contribution room is lost.	If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.
Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal.  They are treated as income and taxed at your current tax rate.	Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.
Since withdrawals are treated as income, withdrawals could reduce retirement government benefits.	Withdrawals are not considered taxable income.  So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.
You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year.	You can contribute to a TFSA after age of 71.
The Summary:  part of your RRSP is borrowed money.	The Summary:  all of your TFSA is your money.

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle even though I contribute to both every year.   All the money in the TFSA is mine to keep, grow and manage with no tax consequences.  The RRSP refund is great but it’s actually temporary; you need to give it back at some point.  This makes reinvesting the RRSP refund year after year absolutely critical in my opinion to optimize wealth building – to take major advantage of an essentially long-term but not permanent government loan.

That said about this loan I firmly believe using the RRSP will work out very well for the majority of Canadians, hopefully myself included!  It totally makes sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal.  Jim Yih has written about this point numerous times in many of his great blogposts.  Check out his articles here and here.

If this tax situation applies to you this RRSP season then by all means use the RRSP as much as you can to defer tax now, grow your portfolio and get your refund back to reinvest money back into your RRSP.  If however for whatever reason, you need to use the RRSP refund for other things this spring (like a vacation?) that’s fine.  As part of this tax season just be mindful of the potential consequences of not managing the refund well this and every “RRSP season”.

Are you contributing to your RRSP this year?  If so, what is your strategy?  To max-out the contribution and reinvest the refund?

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Seen the commercials yet?  Read the ads online or in the papers yet?  I’m sure you have…

The RRSP season is here and the financial institutions are making sure you don’t forget about it/them.

If you haven’t done so already, it’s time to contribute to your Registered Retirement Savings Plan (RRSP) before the 2012 tax year deadline expires on March 1, 2013.

The intentions of our financial institutions are good.  They are encouraging us to save and invest.  This is because the benefits of the RRSP are pretty substantial:

• Your contribution limit this year is the lower of 18% of your earned income or $22,970.
• If you did not use all your contribution room after 1991 including last year, you can carry forward the unused contribution room.  Read more about that here.
• All contributions are tax deductible.
• Investments held in the account can grow tax deferred.
• The RRSP does not need to hold just GICs, bonds or mutual funds.  You can hold ETFs and stocks if you own a self-directed RRSP.
• You can make “in-kind” contributions to your RRSP from other accounts.

What types of RRSPs can you have?

Let’s look at a few account options.

“The Account Just For You”

The most common type of RRSP is an individual plan.  An individual RRSP is an account that’s only in your name and the tax benefits apply to you.  Here are a few common types for folks to consider:

• GIC RRSPs – you invest for a specified term and you get some interest.  These are offered by many banks, trust companies and credit unions.  The interest rate usually isn’t much higher than the yield on a high interest savings account though.
• Mutual Fund RRSPs – these accounts are offered by many financial institutions; you invest in mutual funds but those funds are often subject to sales commissions and higher management fees than other investment products.
• Self-Directed RRSPs – my personal favourite since you can hold pretty much whatever you want (e.g., ETFs, stocks, bonds) with a discount investment broker. This account has the most flexibility.  Check out a “back to basics” post about self-directed RRSPs from Million Dollar Journey here.

“The Account For Someone Special”

A spousal RRSP is registered in the name of your spouse or common-law partner.  They own the investments in the account, you don’t, but you can contribute to it.  Because you make the contributions you get the tax deduction.

“The Account For The Masses”

A group RRSP is a collection of individual RRSPs offered by an employer.  Using a group RRSP, contributions to the plan are usually deducted from your paycheck and employers may match or exceed your paycheck contributions.  You can read more about these types of RRSPs and what investments you can hold within them here.

There is much more to RRSPs than what I wrote above and the contribution deadline for the 2012 tax year is approaching fast.   With a little bit of homework, you can pick the right plan and make some great decisions for your financial future.  So go beyond the marketing and learn more!

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Just like Cinderella needed to leave the ball, time is running out for the 2011 RRSP contribution. 

If you don’t already know, the last day to contribute to your RRSP for the 2011 tax year is February 29, 2012.

As we close out this “RRSP season”, here are some things to consider for the 2011 tax year: 

• The maximum contribution limit for 2011 is $22,450. If you did not use all your RRSP contribution room for years 1991-2011, you can carry forward the unused amount to 2011 – so your deduction limit for 2011 could be more than $22,450.
• Remember you get a tax deduction when money goes in.
• If you don’t know what to invest in, I think you should just contribute the cash anyway.  You can always figure out where that money should be allocated at a later date. 
• Contributing to your RRSP doesn’t mean picking a mutual fund.
• If you’re considering investing in some “hot” mutual funds, I suggest you don’t.  Past performance is just that.  Besides, what’s hot now is likely to be cold later. 
• If you’ve made a decision to contribute to your RRSP into some mutual fund or exchange traded fund (ETF), double-check and understand the fees you are paying for fund performance.  Paying fees, especially high fees, will eat into your portfolio value over time.
• If you have credit card bills that are due – a balance you can’t pay off this month or next – forget what the ads on TV tell you.  I don’t think you should contribute to your RRSP.  I think paying off your credit card may make more sense.
• If you know for sure you will be a lower tax-bracket in retirement that your working years, an RRSP makes great sense.
• If you’re in a lower-to-moderate income bracket, say less than $40,000, I think the TFSA is better than the RRSP for a retirement vehicle.   Forget the RRSP altogether.  Experts also think this way.
• If you make an RRSP contribution and you’re getting a tax refund back because of it, avoid the temptation of spending that refund.  If you spend your refund you are defeating a big benefit of the RRSP, the tax deduction.
• You can make “in-kind” contributions to your RRSP, from other accounts.
• Remember you have to pay taxes when money comes out.  You cannot own an RRSP after age 71. RRSPs must be converted to a RRIF, an annuity or investments need to be sold and monies withdrawn. You can read more about those options here.

Lots to think about I know, and this list is just a start!  The know-how for RRSPs can be overwhelming. 

My bottom line, remember some of these tips if you can but take some time to learn how RRSPs really work and how they can benefit you for your financial situation.  I’ve been reading about this stuff for years, and I’m still learning lots, how to tailor RRSPs to my financial situation.  When in doubt, ask questions, lots of questions.  Nobody cares more about your money than you do.

If you would like more reading on this subject, check out Larry MacDonald’s recent article in the Globe and Mail.

Thanks for reading and sharing this article.

 

No doubt the RRSP deadline is approaching fast.  If you don’t already know, the last day to contribute to your RRSP for the 2011 tax year is February 29, 2012. 

Here are some quick facts about RRSPs as it relates to the 2011 tax year:

• The maximum contribution limit for 2011 is $22,450.   If you did not use all your RRSP contribution room for years 1991-2011, you can carry forward the unused amount to 2011 – so your deduction limit for 2011 could be more than $22,450.
• Your contribution limit should be on your last years’ Notice of Assessment (NOA).  If you don’t what this statement is (or where you filed it), contact the Canada Revenue Agency (CRA) here to find out what your limit is.

With those facts out of the way, it’s important to remind ourselves why the RRSP is such an excellent tool.  Here is a quick refresher since there is so much information available about this vehicle:

• RRSPs were introduced in 1957 to encourage Canadians to save for retirement.
• Some people borrow from this account to help buy their first home.
• Some people borrow from this account for education purposes.
• You get a tax break when money goes in.  You get tax-deferred growth. 
• RRSPs have withholding taxes.  You can find out more information about RRSP withholding taxes here, but a summary is provided below:

RRSP Withdrawal Amount	Withholding Tax
Up to $5,000	10% (5% in Quebec)
$5,001 to $15,000	20% (10% in Quebec)
$15,001 +	30% (15% in Quebec)

• You cannot hold your RRSP after age 71.  RRSPs must be converted to a RRIF, an annuity or investments need to be sold and monies withdrawn.   You can read more about those options here.

Most Canadians are enamoured with RRSPs, for all the great reasons above and more.  This tool is also a component in our retirement plan but just one of many.  Instead of busting our butts every winter to maximize our RRSPs we choose to optimize our RRSPs instead.  That is, we contribute only enough money to our RRSPs to avoid paying any more income taxes.  If anything, we might get a small tax return back (which is fine).

Why do we do this?

1)      Maximizing the RRSP takes a whack of cash

When you crunch the numbers, maximizing the RRSP contribution is a challenging task.  I don’t know about you but saving 18% of our income amongst everything else on the go is a very tall order.  I don’t need the stress of worrying about this every year, which leads me to reason # 2.

2)      We’ve got competing priorities

A Globe & Mail article a few weeks ago stated “Canadians might want to stop working before the age of 65, but for the many who don’t have enough saved that retirement goal is just a pipe dream.”   OK, but as 30-somethings we’ve got more to worry about that just retirement.  How about: 

• Paying down mortgage debt.
• Paying off credit cards every month.
• Making TFSA contributions.
• Creating an emergency fund, and last but not least,
• Enjoying life.

Saving for retirement is very important and necessary but it doesn’t trump everything else. 

3)      I don’t like borrowing from the government (too much)

In a recent post, I said RRSPs are excellent because the contribution you make lowers your taxable income and you may get a tax refund because of it.  A great formula!  Yet I know this refund is really a long-term loan from the government.  A refund associated with my RRSP contribution should not be considered a financial windfall but instead, present value money for a future tax payment I’ll be required to make.  RRSPs provide tax-deferred (not tax-free) growth.  At some point, the tax man will find you (and I) and ask for his refund back in whole or in part.  

In closing, I think RRSPs are great.  We contribute to them throughout the year, a few thousand dollars in fact but only to optimize our accounts for tax purposes.  This way, we don’t need to stress about our financial situation when some bank ads appear this month.   By optimizing our RRSPs, we can divert income to other things in life.  There’s much more to life than mortgage payments…right?!  Lastly, we know these taxes are deferred not free so by contributing moderate sums today, we’ll avoid a considerable tax consequence years down the road. 

RRSPs are a great tool and we’ll be using ours for years to come for sure.  Before you rush out to maximize your RRSP this month, I think you’d be wise to determine how RRSPs apply to your overall financial plan.  Maximizing them may not be the right strategy for you.

 

Thanks for reading and sharing this article.