Buying RRSPs – More Peterborough Financial Advice

This post is for any Peterborough and area residents who are looking for more information about purchasing RRSPs. As we near the end of of the year, many people start having a better idea of what year end income and taxes they are going to have and plan accordingly. Since their inception in 1957, RRSPs have been a favourite of Canadian residents for a tax saving strategy. As you know, you have up until March 1, 2012 to make a contribution for your 2011 taxes. If an investor contributes $10,000 prior to this date it will effectively lower their taxable income by the same amount which should result in a refund. This will vary depending on your tax bracket. Some figures to be aware of for 2011 contributions are that you are entitled to a contribution of 18% of your previous year’s income up to a max of $22,450. Also, keep in mind that you can carry forward your unused contribution room if you do not use it. This will always been listed on your notice of assessments from CRA for your viewing. RRSPs are not the only method in which to reduce taxes owing but we will leave that topic for another post.

Once you have figured out how much you want or need to contribute you then have to pick a suitable investment type within the RRSP structure. It is amazing how many people do not understand that they can actually pick many different types of investments to invest their RRSP in. You could have your RRSP in a GIC, mutual fund, Stock, syndicate mortgage or segregated fund to name a few. These choices should always be based on one’s age, timeline and risk tolerance. Always play an active role in picking your investments and understanding them. It is key to know where you are invested and what the fund manager is invested in. Most people we meet with simply have no clue about any of these things.

Most investors think they have 2 choices when it comes to investing their RRSPs. They think they can choose a safe and secure GIC which are currently paying all time low rates. The current top 1 year rate in Canada is 1.90%. If that is not satisfactory and they need some growth then they will look at a mutual fund. A mutual fund is essentially a basket of individual stocks picked by a fund manager. These of course fluctuate every day and have been very volatile over the last few years. Currently the average for Canadian equity funds have been as follows: 1 yr -1.30%, 3yr 2.45%, 5yr 0.74% and 10 yr 5.53%. As you can see both options have their pro’s and con’s. You have to be willing to accept less for the security of a GIC or ride the ups and downs of the stock market to get the growth potential. What many people don’t realize is that there are other options which provide security with growth potential.

The last point which we need to touch on is withdrawing from an RRSP. As you know, our government (CRA) tell’s us when we have to start withdrawing from our RRSPs. The current age which you have to start withdrawing the minimum amount from your RRSP is the year in which the account holder turns 71. This means that no matter what tax bracket you are in, you have to start taking a determined amount out of your RRSP and including it as income. This means turning it into a RRIF. For somebody aged 71 who opened their RRIF after 1992, they would have to withdraw 7.38% of the plan value. This amount goes up every year as you get older. As I am sure you can see, if you aren’t earning this amount or more then you will be depleting your principal rather quickly. Some people may live another 15 to 20 years or more and possibly run out of money if they don’t plan correctly. The point being made is that there are RRSP eligible investments that are safe and secure that will pay 8% or higher per year with no market volatility. You just have to be made aware of them and how they work. How does the saying on TV go? It’s what you don’t know which may be hurting you the most!

If you are unhappy with the performance of your current RRSP portfolio and seek a second opinion, please feel free to contact one of our Peterborough financial advisors today. You might be surprised at what other options are available for you.