With the end of the year quickly approaching, many investors will again focus on their RRSPs and what contributions they would like to make. However, there are a growing number of investors that have decided not to invest into RRSPs, believing they are not worth making 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. This is a huge benefit for individuals that make a contribution.
Many people believe that the tax savings from an RRSP contribution is not really savings since you will still have to pay income tax when you withdraw the money. These individuals 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 anyway? The premise is that when you begin to draw on your retirement savings, you will no longer be working and thus have little 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 in order to be able to pull it out when that individual is no longer employed and likely in a lower tax bracket. Therefore this is not only a tax deferral situation but also, in many cases, a form of tax savings as well. For those who 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.
Spousal RRSP accounts, though often overlooked, 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. Spousal RRSPs 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 contributor invests in the account, they will receive the 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 in the spousal account can be removed at the lower income earning spouse’s (the annuitant/owner) 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 two or 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 roughly the first $10,000 earned, thus by using some strategy, spousal RRSPs can work to reduce tax and help save for a couple’s retirement.
So with approximately six weeks left to the end of the year and the kickoff to the new 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 advisor 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 a Senior Investment Advisor with DWM Securities Inc., a
DundeeWealth Inc. Company. This is not an official publication of DWM
Securities Inc. The views expressed are those of the author alone and
are not necessarily those of DWM Securities Inc.