I've been answering a lot of questions about Tax-Free Savings Accounts on radio and TV shows in recent weeks. But with all the excitement over the new TFSA program, we shouldn't lose sight of the fact that RRSPs are still the best way for most Canadians to save for retirement and the March 2 contribution deadline for the 2008 tax year is rapidly approaching.
Recently CTV's Canada A.M. asked me to spend a little time answering questions from viewers about RRSPs. If you missed the show, here are some of the questions that we dealt with plus a few we did not have time to answer on air.
Q - Is it a good idea to put money into RRSP rather than a savings account if I intend on using that money to purchase our first home in the next few years? - Sham
A - Absolutely. Saving for a home within an RRSP enables you to use before-tax money because your contribution will generate an offsetting deduction. Also, once the money is in the plan it will grow more quickly because no tax will be assessed. The recent federal budget increased the amount that can be borrowed from an RRSP interest-free under the Home Buyers' Plan to $25,000. This means a couple could save as much as $50,000 in their plans to use as a down payment on a first home.
Want to get the home more quickly? Use the refund to open a Tax-Free Savings Account. You'll save in two ways and no tax will be payable on the money you withdraw.
Q - What should I do with my company pension? I'm 49 years old and was recently laid off after 30 years with a company. I have the option of keeping my pension and collecting from it when I turn 60 or take the lump sum and invest myself. - Linda
A - In the past, this was a no-brainer. If you have a defined benefit plan (one which pays a guaranteed income at retirement) my advice was always to stay with it. When it comes to retirement money, certainty wins every time.
However, there is now another factor to consider: how solvent is the pension plan and how strong is the company behind it? In recent years, we've seen numerous cases of pension plans failing while others have had to ask members to accept a cut in benefits. So before you decide, take a close look at the financial health of the plan. If you're not satisfied, you may prefer to take the payout and invest it conservatively.
Q - I am 26 and just recently opened an RRSP account. Is taking out a low interest loan so I can deposit the yearly maximum into my RRSP account and then using my tax return to pay off the loan a smart or even necessary move at my age? - Stephanie
A - It's an excellent idea. The younger you are when you begin making RRSP contributions, the more time you have to take advantage of the magic of compounding. However, it is important that you follow through and pay off the loan as soon as possible. Don't let the debt pile up. Also, remember that you may not claim a tax deduction for interest paid on an RRSP loan.
Q - Is it true that if you are in a low income tax bracket now, a RRSP is not good? Because when you retire and cash in your RRSP you'll be taxed a higher rate? - Derek, South River ON
A - You might not be taxed at a higher rate after retirement but as a general rule modest-income people should opt for a TFSA over an RRSP. The reason is that TFSA withdrawals will not affect eligibility for Guaranteed Income Supplement payments, income-tested tax credits, etc.
Q - I am a 64-year-old retired widow. I need to access some money from my RRSP this year to supplement my pension. My financial advisor has suggested that I draw the money from my secured line of credit instead and give the markets time to rebound. Do you agree? - Janice
A - It depends. Stock markets will eventually recover but no one can predict how long it will be before that happens. Remember that the last bear market took about two years to run its course (2000-2002). If you use the line of credit, you'll be incurring debt and have to pay interest on the money. If this bear market continues into 2010, that could start to mount up. In the end, your level of risk tolerance and need for peace of mind will dictate your decision. If the idea of adding debt bothers you, then draw from the RRSP.
Q - I'm 26 years old with $60,000 debt from my post secondary education. I make less than $20,000 a year (after taxes). Is there a plan for me so I can set up an RRSP and deposit $25 a month and still see a positive result? - Jen
A - Sure. Most financial institutions offer automatic RRSP plans such as the one you describe and some will accept minimums as low as $25 a month. Of course, you could use the money to reduce your student loans but presumably you are paying a low rate of interest on those and that amount is tax deductible.
Gordon Pape's new book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich. It can be purchased at 27 per cent off the suggested retail price at http://astore.amazon.ca/buildicaquizm-20
© 2007 The Globe and Mail. All rights reserved.
