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RRSP & Retirement Planning Strategy
Gary Huston, CA, CFP
We once again find ourselves at the time of year when thoughts turn to tax planning and retirement investment strategies. In light of this, we want to offer some points for your consideration.
Retirement Investment Strategies
Borrow money to contribute to RRSPs. As the cost of borrowing money is still relatively low, consider borrowing money to take advantage of any unused RRSP contribution room. The immediate tax savings, plus any tax-deferred growth inside your RRSP, will likely outweigh interest costs. In addition, if you are applying this to the 2000 taxation year, the tax benefits should be more advantageous than in future years, given the trend towards declining tax rates.
Money held outside of an RRSP. Consider transferring those investments into an RRSP and then borrowing to make non-registered investments. In this way, interest on the money borrowed will likely be tax deductible.
Tax Planning Strategies
Income from RRIFs
If your spouse is younger than you are, you can base your withdrawals on your spouse’s age, thus reducing your minimum annual withdrawal.
If the RRIF has been set up prior to December 31, consider postponing the first withdrawal to the subsequent calendar year, thereby deferring income to the following year.
In the case of a spousal RRSP being converted to a RRIF, ensure withdrawals do not exceed the minimum required for the first three years. This should serve to avoid attribution back to the contributing spouse.
For the Self-employed
Consider hiring your children. If you own your own business, you can save taxes by paying your children a reasonable salary for any work they do. Reasonable wages paid during the year are a deductible expense to your business and taxed in your children’s hands.
For Employees
Arrange an employer-direct RRSP contribution. Let’s look at an example: You receive a $10,000 bonus — if remitted directly to the RRSP, there is no tax deducted at source.
Employer direct RRSP contributions. In effect, these give you your tax refund up front, which you would otherwise receive when you file your tax return the following year.
For Families
Consider lending money to family members. Providing you charge interest on the loan at the rate prescribed by Canada Customs & Revenue — or at the current commercial rate (whichever is lower) — you can avoid attribution back to you for income earned on the money lent.
This interest must be paid to you by January 30 of the year following the year the loan was made and will be taxed as your income.
The family member will be taxed on the investment income but can deduct the interest paid on the loan.
If the rate of return on the investment is greater than the interest charged you would have succeeded in splitting your income.
Consider making RESP contributions. All contributions must be made before December 31.
The subscriber to an RESP can contribute up to a maximum of $4,000 per year, per beneficiary, to the plan; however, a maximum of $2,000 per qualified beneficiary is eligible for the 20% Canada Education Savings Grant (CESG).
Unused CESG “room” for the year may be carried forward to following years, up to the annual maximum contribution of $4000.
In conclusion, we hope we have given you some fresh ideas on an old subject, and we encourage you to take every opportunity to ensure that you retain as much of your hard-earned income as possible.
Tax planning is best accomplished on a year-round basis rather than seasonal. We applaud our many clients who are planning on a year-round basis.
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1) RRSP & Retirement Planning Strategy
2) RRSP or mortgage pay-down
3) Dollar Cost Averaging: A Winning Strategy for Investing
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