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Table of Contents
Put your financial adviser on a leash
February 11, 2000
100% Foreign content for your RSP
December 22, 1999
Tax Loss Selling or Dealing With Your Mistakes
November 26, 1999
Life Stages of your RRSPs
November 12, 1999
Just give me boring (but great) rates of return
November 3, 1999
De-mystifying Demutualization - part Two
October 25, 1999
De-mystifying Demutualization - part One
October 19, 1999
Seg funds for the simple minded
September 14, 1999
The interest rate game Part 2
August 12, 1999
The interest rate game Part 1
July 30, 1999
Choosing funds: Five for the long run
July 14, 1999
New Funds: To buy or not to buy
July 2, 1999
Making sense of momentum investing
June 18, 1999
Rating the fund managers
June 4, 1999
Resource recovery hinges on supply and demand
April 30, 1999
Tech funds draw strength from favourable trends
March 24, 1999
Withdrawing from your RRSP
March 9, 1999
The economic implications of the euro - An interview with Ranga Chand
February 12, 1999
Underperforming small-cap funds have strong upside potential
January 29, 1999
How to pick a winning equity fund portfolio
January 15, 1999
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Life Stages of your RRSPs

JENNIFER WARRIS
Warris Communications
Friday, November 12, 1999

RRSPs are a wonderful thing: they defer taxes (which puts more money in your pocket today), they allow your investment to grow inside a tax shelter (which puts more money in your pocket tomorrow), and-best of all-they help you save for a comfortable retirement.

But current income tax laws say that when you turn 69, you must convert your RRSP to either a RRIF or an annuity. If you choose an annuity, you reduce your control over your investment and place yourself at the mercy of interest rates. If you opt for a RRIF, you must withdraw a specified minimum amount from your account each year and you must pay tax on that money at your marginal tax rate, just as if it was regular earned income. It doesn't matter if you are withdrawing capital gains earned on mutual funds or dividends earned from preferred shares, withdrawals from registered accounts aren't eligible for the lower tax rates these types of earnings enjoy in unregistered accounts.

According to Sandy Kellar, a Certified Financial Planner with The Investment Centre in Strathroy, Ontario, there is a time to invest in an RRSP and there is a time to make early withdrawals: "Your RRSP investment strategy should depend less on your age than on the stage of life you are at."

Sandy points out that blindly pouring funds into an RRSP year after year is not a tax-efficient strategy. Nor does it help resolve your cash flow needs at different stages in your life. Here are Sandy's recommendations for the three life stages that the average wage earner goes through.

Life Stage 1: All That Money (Who cares about the taxes!)
You're young, single and just starting out in the working world. Cash flow isn't an issue. In fact, you don't know what to do with the extra money. So you stuff it into an RRSP, right?

Wrong! Unless you started into your new job making $50-60,000 per year, this is a really bad time to put money into an RRSP, especially if you, like most people, do not reinvest your income tax refund on top of your annual RRSP contribution.

You see, the higher your income tax bracket, the more benefit you'll receive from your annual contribution. If you have started out in a low tax bracket, you should put your money into unregistered investments and let your RRSP contribution room build up. You're going to need it before long!

Results: By investing as soon as you can, you put time and the power of compound growth to work for you. With unregistered investments, you are not limited to 20% foreign content, so you can take advantage of potentially higher returns on international investments.

Don't worry about losing your unused contribution room. Even if the government changes the RRSP rules, they give enough advance warning to let you transfer your investment to a registered account or take out an investment loan to use up that contribution room if you suddenly have to. Be sure to listen carefully for RRSP rule changes when the federal budget is announced each February.

Life Stage 2: All Those Taxes (Where will we get the money?)
Time passes. A new job or raises along the way have put you into a higher tax bracket. But now your cash flow is tight-you're raising a family, carrying a mortgage, paying for the kids' education, and struggling to make ends meet. You could really use a break.

This is where your unused RRSP contribution room comes in handy. First, take some of your unregistered investments and transfer them into your RRSP for a larger income tax refund. Note that you'll have to pay tax on any capital gains that have accrued but you will not be able to use the capital loss if your investment loses money (aren't tax rules great?). Next, set up a comfortable monthly RRSP contribution program with whatever cash flow you can spare to keep your annual tax bill as low as possible.

Results: You get a large income tax refund to start an RESP for the kids, or pay off those credit cards, or pay down the mortgage. You are now contributing to your RRSP on a regular basis at a time in your life that makes more sense economically. After all, the higher your tax bracket, the more you will benefit from your RRSP contribution.

Life Stage 3: All That Money (All those taxes!)
Your kids have moved out and have kids of their own. You're in the highest tax bracket you will ever be in as a wage earner, so you have been diligently contributing the maximum to your RRSP. You know that the government is waiting for you to turn 69, when you will have to convert your RRSP to a RRIF and start drawing an income from it. In fact, if you have been really aggressive about contributing and investing, that forced income may be even higher in retirement than when you were working! With a huge tax bill staring you in the face, you think that there has to be a way to access your registered savings without paying so much tax. You may not be able to completely eliminate the income tax payable on your registered withdrawals because of the effect of the withholding tax, but here is a strategy that can greatly reduce it.

First, arrange an investment loan and invest the money you receive in an unregistered account. Next, take enough money out of your RRSP on an annual basis to cover the interest payments on your loan (plus any withholding tax). You must declare all the money that you withdraw from a registered plan as income, but you can offset the income tax that you must pay by using your interest payments for your unregistered investment as a deduction. (Note: if you withdraw only the minimum amount from a RRIF you will be able to avoid the withholding tax altogether.)

Result: Instead of paying 50% of your RRSP withdrawals to the government (if you are in the highest tax bracket), you could pay less than 5% ($499 withholding tax on $4,999 x 50% tax = $249.50 which is 5% of $4,999) when you use this leveraging strategy. If you need additional income tax deductions for any reason while you are using this strategy, you can continue to add to your RRSP right up to age 69.

If you follow this strategy, when it comes time to plan your retirement income, you won't be boxed in by the RRSP legislation of the day. You-not the federal finance minister-will decide how much income you withdraw annually from your unregistered retirement savings. And, if future retirement supplements are based on income (as some are today), you may be eligible for even more benefits!

Remember, when it comes to RRSP strategies, one size does not fit all. Retirement planning should not make you RRSP rich and cash flow poor at any stage in your life. Don't invest blindly in an RRSP this year.

Jennifer Warris, Warris Communications

This article was published in Canadian MoneySaver, Independent Personal Finance Advice since 1981. Visit www.canadianmoneysaver.ca or E-mail us at moneyinfo@canadianmoneysaver.ca

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