RRSP season is quickly drawing to a close, and many RRSP investors will be scrambling during the last week to meet their advisor or get out to their banks to make their last minute contribution and be eligible to claim it against their income for 2010.
However, there are a growing number of investors that have decided not to invest in their RRSPs, believing they’re investments not worth making. I have heard some explain that RRSPs accounts are not worth having if they will have to pay tax on their savings when they pull out their money in the future. Has skepticism started to creep into the minds of investors about the merits of RRSP investing?
In my opinion, the fundamental premise behind making an RRSP contribution is to save for your retirement. By investing money in an RRSP account, you gain the benefit of tax sheltered growth. Over the long term, having your money grow tax free can put a lot more money in an investor’s pocket than if they had to pay taxes each year along the way. In addition to this, the government will allow you to tax deduct your contribution to an RRSP account from your annual income. Thus, if your income for the year is $80,000 and you were to make an RRSP contribution of $10,000, you would only have to pay tax on $70,000 worth of income that year, another huge benefit for those who make their contributions.
Those who believe they are not sound investments because taxes will eventually have to be paid consider RRSPs as more of a tax deferral then tax savings. In some cases I agree. However, what is wrong with deferring your tax payments to a later date? The premise is that when you begin to draw on your retirement savings, you will no longer be working and thus have no income at that time. The income you will be receiving, for the most part, will be coming from pensions (corporate or government), investments or your RRSP plan. Therefore, an individual deposits money into an RRSP while they are working and in a higher tax bracket, to be able to pull it out when that individual is no longer working and in most cases in a lower tax bracket. Therefore, this is not only a tax deferral situation, but can can be a form of tax savings as well. For those individuals that will have the same amount of income throughout their entire lives — even in retirement — RRSPs should just be considered for its tax free growth and tax deferral properties.
The often overlooked spousal RRSP accounts can be a huge addition to a person’s tax and retirement strategy. If there is a situation that exists where one spouse earns a lot more than the other, spousal RRSPs can be a great idea to set up. The spousal RRSP would be set up in the name of the lesser income earning spouse with the higher income earning spouse as the contributor to the plan. When the contributing spouse makes a contribution to the spousal account, they will receive the tax deduction against their income tax for that year. However, once the year in which the contribution was made, plus two more years have passed, the money inside the spousal account can be removed at the lower income tax rate. Thus, the money is deposited and the higher income earner gets the benefit of the tax deduction, and the lower income earner pulls the money out and pays the tax after roughly two to three years.
In some cases, if the lower income earning spouse does not work at all and has virtually no income, they can pull the money out and pay literally no tax at all. Every individual is tax exempt on approximately the first $10,000 of income earned. Thus, by using some strategy, spousal RRSPs can work to reduce tax and help save for a couple’s retirement.
So with about one more week left in RRSP season, I recommend all investors think hard about whether RRSP investments are right for you. In most cases, I believe you will realize they are. The positives in my opinion definitely outweigh the negatives when it comes to contributing to an RRSP.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.