Weigh both pros, cons before investing
Q Currently, I am a manager at a mid-size logistics firm. I recently got married and live in a two-bedroom condo in Oakville. Several weeks ago, my wife and I attended a financial show in Toronto and concluded we should have some investments aside from our condo. However, I received conflicting opinions when it comes to RRSPs. Should I invest my money in an RRSP or not?
— Josh, Oakville
A Feb. 29 is the deadline to contribute to a Registered Retirement Savings Plan (RRSP) and qualify for the deduction on your 2007 income tax return.
With this deadline fast approaching, as if we all have not noticed the billboards and TV ads, many financial institutions aggressively compete for your RRSP dollar.
Recent statistics compared January 2008 mutual fund sales to last year, indicating a dismal beginning for investment firms. The mortgage meltdown has had a definite impact on Canadians’ adversity to risk.
Many financial advisers would agree — RRSPs are great for most taxpayers. Toronto’s Arpad Komjathy, MBA, financial adviser with Bick Financial Security Corporation, completes a comprehensive financial plan with the primary focus that his client’s interest always come first.
Komjathy assesses each client’s situation in order to arrive at precisely the recommendations that are right for them. You should consider a meeting with an adviser/accountant.
Let’s look at some of the advantageous and disadvantageous with investments in an RRSP.
The Pro-RRSPs Camp:
- The contribution can be deducted on your income tax return. Results in greater tax refund.
- Investment income earned is tax sheltered.
- New rules allow retirement income splitting.
- Force savings for individuals that lack the discipline to save.
- Investments not taxed have the opportunity to compound over many years.
- Taxpayer can deduct contributions at higher tax bracket and withdraw when in lower tax bracket.
- RRSP money can be withdrawn without attracting taxes and used to finance first-time homes and education.
- Emotional distinction: Individual feels they have bested the taxman and getting a greater tax refund.
The Con-RRSPs camp:
- Investments are too restrictive.
- Money cannot be withdrawn and may be taxed at a higher rate than the initial deduction.
- When withdrawn, does not keep tax preferential treatment. For example, capital gains outside RRSP gets taxed on 50 per cent, not so for an RRSP withdrawal.
Individual must consider retirement income and claw-back on government income.
- Individual should pay down high interest debt before RRSP contributions.
- Interest on money borrowed is not tax deductible. On the other hand, interest is tax deductible on investments outside RRSP.
- Emotional distinction: Individual can retire well without buying into the hype of the big banks and following like many Canadians.
The argument continues. Although no one shoe fits all, generally, for the vast majority of Canadians, RRSPs should be part of their tax and retirement planning.