This & That: RRSP Edition
Posted by Gail | Filed under Retirement Planning
It’s January and it is only a matter of time before all the RRSP ads start. Of course, if you’re a smart person and have committed to taking control of your money and your life, you aren’t catching up your RRSP contribution for last year…. no, you’ve started contributing for this year. Good for you. I’m amazed that there are still so many questions surrounding RRSPs since they’ve been around longer than I have, which is saying something!
L wrote: CRA says spousal contributions can be withdrawn by spouse (not attributed back to contributor) on previous contribution years (only excluding the current for 3 years AND new spousal contributions can be made by spouse even if the spouse has a RIF as well as RRSPs. Does this sound right? Banks disagree with CRA; CRA often disagrees with CRA. None of them will put anything in writing. Thanks. Love your show and blog.
L, the RSP withdrawal rules are that money will be attributed to the contributor if withdrawn from a spousal RSP in the year of contribution or two previous calendar years. And spousal contributions can be made to an RSP right up until the planholder turns 71, regardless of what other plans exist.
Z wrote: I would like to know if there is any “bad” time or place to invest your money for long-term (30 yrs), retirement purposes. I find that contributing to my RRSP is the easiest step as I have been following my Gail budget very well. So I have a ton of money sitting in my RRSP account that is doing absolutely nothing and earning zero interest. I’m sure this is not what you are trying to get ppl to do! The account is an online brokerage which I have used to buy a few index funds as that was the only type of “stock/investment” I could decipher.
Should I just take the plunge and buy more? Should I wait for something to happen in the marketplace? What am I waiting for, what should I be watching for? I think a lot of your viewers/readers have become savvy enough to understand what an RRSP is and to actually collect the money to contribute, however could you help us with Part 2 b/c I am not benefitting from compounding interest of any kind as I have no idea what to do with the money I have.
Z, you’re right when you say sticking the money in the RRSP without choosing an investment — letting it linger earning nothing — is never a good plan. I have an advisor who helps me to invest my retirement portfolio for two reasons:
- I am not close enough to the markets on a daily basis to actually know what’s going on. He is.
- I just don’t have the time. With a busy work and home life, I wouldn’t give my portfolio the kind of attention it needs to do well.
My best advice is to find an advisor who can help you; not one that wants to assume control, but one who wants to make sure you get what YOU want both in terms of the types of investments you’re comfortable with, and the returns you want.
No, sorry, I don’t make referrals, but you can ask your family, friends, co-workers, boss, whomever you know that may have someone to whom they can refer you. Make sure you feel very comfortable with that person, and that he or she is willing to spend the time you need.
A & D wrote: We are starting to plan to buy a house and researching first as we have friends who jumped in head first and have seen what happens when you don`t plan these things out. Using the “rule of thumbs” I’ve found on your site and others, we’ve calculated we should be able to afford to buy a home for $170,000 (a little under 2.5 times our gross income). With downpayment (20%), closing costs (1.5%), a start on a maintenance fund ($2000), 3 months’ essential expenses ($7,500) and stuff we will need for the house ($2,500 for window coverings, etc.) we are estimating we would like to have about $46,400 saved before making the leap. Our current rental expenses are only $819.98, we are estimating to own would cost $1737.71 (bi weekly accelerated mortgage payments, property taxes at rate posted on city website, 3% maintenance, utilities, home insurance quoted online). Our plan is to start saving the difference of $917.73 per month as you suggested so we should be ready in a little over 4 years. THE QUESTION IS: What should we do with the savings? I think RRSP`s to be withdrawn under the home buyers plan to the maximum of $20,000 so we can get the tax refund and grow our savings faster and the balance to tax free savings. My husband wants to put the money in GIC`s for the interest & to remove temptation by restricting access to the money. What would you do???
A & D, I think using the RRSP Home Buyer’s Plan is a good idea. Since an RRSP is not an investment, it’s just a plan number or “umbrella” that protects the money from tax, you could use a GIC within the RRSP to meet both your needs. Keep in mind that your HBP has to be repaid once you buy your home, so calculate the 1/15 repayment amount into your budget once you own.
B wrote: My husband and I are both 30. Our net monthly income is $5540. I have $26,854 at 4.75% in OSAP loans outstanding (separated into 3 loans at $2350, $3416 and $15,326) and he has $13,576 of a student line of credit at 3.25%. We have a car loan of $7452 at 10.99% that will be paid off in 3 years ($263/mo). I have about $1200 in RSP savings and my husband about $3000. (he has an RSP arrangement with his work where they match his contribution) We have $4300 in an ING savings account. No credit card debt. After paying $200 on each of the student loans ($800/mo.) and $100/mo. toward each of our RSPs we have about $900 in extra money monthly – I have been putting this money into the ING account. I want to pay off our debt, and I also want to save for our retirement and for a down payment on a future house. What should I do with this money? Should it go into RSPs? Should it be going towards our student loans to pay them off sooner and forget about investments and down payments at the moment? Should I put it towards paying off the car loan at the highest interest rate? Or should I have it sit in an ‘emergency’ account? Should I invest it? How much should we have saved for an emergency? What is the best strategy?
B, if it were my $900, I’d put $200 in long term savings (RRSP), $200 a month toward building up an emergency fund (using a TFSA) and the rest would go to the highest-cost debt. Once the car was paid off, then I’d take all the money I was using for car payments and move it to debt, paying off the most expensive first, while keeping up with the other minimums. Once I’d cut my debt in half, I’d put the rest on a three-year repayment plan and use all the rest of the extra money to start building a downpayment for a home.
L wrote: Love the show, you have helped my wife and I turn our lives around. We now actually have a savings account. :) So here is the background and a question. We will be consumer debt free in 2 years and mortgage free in 3 years. I am 52 and my wife is 50. We both have government pension plans although we will have to work until we are 65 to get in our 20 years of service. We have no money set aside in RRSP’s and we have just begun, thanks to the magic jars, to set aside $400 a month for savings. My wife would like to start an RRSP splitting 1/2 of our savings into RRSP and the other 1/2 into a TFSA. I would prefer to have 6 months $$ set aside in an emergency fund before we begin the RRSP savings. We plan to sock her entire salary into RRSP’s in 3 years when we are debt free. Any suggestions on our best way to proceed?
L, because you have government pensions, you should focus on getting your maximum into your emergency fund first. As well, I don’t think you will have a lot of RRSP room because of those pensions. At your age you should focus on maximizing your TFSAs — you can each do up to $5,000 a year in TFSAs — and then if you still have money to save, look to see what your RRSP room looks like.
C wrote: I have a question about RRSP’s…not purchasing them, I get the immediate benefits of contributing, but what happens when you cash them in? I’m a bit confused and hesitant to purchase them because of this confusion.
I believe that RRSP’s may increase my standard of living when I retire, but I’m worried about the tax implications when I retire. If I’m receiving a pension from my employer, CPP, and Old Age Pension (or would I even qualify for this), would drawing on RRSP’s, put me in a higher tax bracket resulting in me paying a lot of tax in the future? I’ve heard stories of people paying huge amounts of tax after they retire when they draw on their RRSP’s. Can you clarify this for me? My pension contribution are so far 10% of my net income, so I am not currently topping up with RRSP contributions. However, I believe in a few years, well, four years, I will be in a position to start contributing again, and I’m not sure if this is wise for me or not. What do you think?
C, what a good question. I know that there’s a lot of chat about how much tax will have to be paid on RRSP withdrawals, and the idea of whether or not it will be worth it. Let me see if I can clarify some of the issues for you:
1. First there’s the whole idea of whether an RRSP is even worth the effort because of the way it affects other retirement income in terms of taxes. This is a two-pronged issue. For people who are on a very limited income, who will likely make as much or almost as much from their government pensions (CPP/OAS) as from working, then setting money aside in an RRSP makes very little sense. Since they’ll already be replacing most of their income from their pension and their income is so low that contributions affect their quality of life now, these people need to focus on an emergency fund and on having some fun. For the people who will make so much from their pension (private and government) that their personal (RRSP) savings add very little more NEEDED income, then there is an argument made that the RRSP is irrelevant.
2. Next there’s the whole “growth inside the RRSP” thang! When you start contributing to an RRSP at a young age, and have 30, 35, 0r 40 years to watch the money compound on a tax-deferred basis, the growth inside an RRSP is staggeringly higher than outside an RRSP. And I am totally convinced it makes sense. Even at your age, the RRSP will have 27 years to work it’s magic, assuming you retire at the normal retirement age of 65.
3. The tax advantage is also nothing to be sneezed at. If you pay tax at 30% and put $1,000 in an RRSP, you will receive a tax refund of $300 that you can then use to pay down a mortgage, build educational savings or have some fun. It’s a bird in the hand now.
4. The RRSP was created so people who did not have a company pension plan would have the same opportunity to build retirement assets as those lucky enough to belong to a plan at work.
Okay, so the questions you have to ask yourself are these:
- Am I so sure that I’ll have this job forever that I am well-set for retirement when it comes time to hang up my boots?
- Will my pension be enough, or do I need to have a pool of money for things above and beyond what my pension will cover? If so, how much do I think I’ll need? Am I there yet?
- Are there other things that I could be using these contribution dollars for that would bring me a bigger bang for my buck? This could be anything from educational savings for your daughter, to travel that you’ve been longing to do.
- Will a strategy of using an non-RRSP investment portfolio work better for me than investing inside an RRSP?
I’m the girl that constantly shrieks, “Does it work for YOU?” While my basic rules (don’t spend more money than you make, save something, get your debt paid off, and plan for the worst) are what I consider the MUST HAVES, you’re clearly already doing those, and the decision to do more, save more, have more later has to be yours.
I often tell people who belong to really good pension plans — like the teachers I’ve worked with — that they’re already hitting their retirement target with their company pension, and as long as some crap doesn’t come along to throw them off course, that company pension will do the trick, so they should have some fun. But it boils down to what is important to YOU.
I know I’ve put a lot on the plate here. Digest, and then if you have more questions, let me know.
Maureen wrote: My husband and I are considering a self directed mortgage. Our mortgage is due on August 1, 2009, we owe $116,000, our home is worth about $380,000. We are dealing with TD Canada Trust. What do you think about self directed mortgages? Do you think self directed mortgages are a good idea?
Maureen, I like self-directed mortgages but I don’t think you have enough mortgage left to make it pay. With all the fees involved, I think you’d need a mortgage of at least $200,000 to compensate for fees and today’s low interest rates.
January 13, 2010 at 8:03 am
Gail, that is some great retirement advice. I have $22,000 saved up in an RRSP and I’m only 29. I figure I’m doing alright so far.
Regards,
Jason
January 13, 2010 at 8:44 am
Sounds like you are doing good Jason! Way to go!
January 13, 2010 at 9:01 am
This RRSP advice is priceless. It’s nice to hear some unbiased facts before we start getting bombarded with ads telling us we’re all failures if we aren’t contributing gazillions of dollars every year.
RRSPs are like any other financial instrument: you have know how it works to make it work for your unique situation. Gail has given a great tutorial here!
I, like Z, have some RRSP money doing nothing in a discount brokerage account. I just don’t want to put it back into the market right now. In the meantime, I transferred a nice percentage of it to a higher paying savings account.
Still, some of it is still there – earning nothing. This is a beef I have with brokerages: I really wish they would pay at least a fair interest rate on uninvested cash balances. Has anyone out there found one who does?
January 13, 2010 at 9:31 am
@ anyone – What is a self directed mortgage?
THANKS!
January 13, 2010 at 10:13 am
Alexandra, I found a good explanation of the self directed RRSP Mortgage:
http://www.rlb.ca/Articles/Default.aspx?ar=127
January 13, 2010 at 10:24 am
HI All – I don’t have too much to say about the RRSP. I have nearly all my saved dollars in RRSP GICs, with the intention of using them in a couple of years for a downpayment on a home. I took out a RRSP loan in October, after calculating how much I would have to squirrel away in order to get a decent tax return for 2009.
On an unrelated note – for those of you who know my dire situation regarding my divorce, and the nasty battle over child access/residency of the children and child support – today is my court date. I am terribly worried that outcome will take away my ability to see my children, and ultimately bankrupt me (for the second time). Those of you who believe – a prayer before the 2pm start would be appreciated more than you know. Thanks to those of you who gave me support in the past months.
January 13, 2010 at 10:28 am
@ anyone also: I’ve been working on a debt-repayment plan that’s been very agressive at the detriment to my TSFA/savings (but not RRSP, it’s getting 12% every year, but I still have LOADS of make-up room from past years of zero contributions). Now I’m wondering if I shouldn’t just lighten up on the debt repayment and go to a 2.5 year plan from a 1-1.5 year plan, get some emergency fund room built up, and still pay down the debt, just not as agressively. I find I’m robbing Peter to pay Paul (putting necessities like boots/gloves/etc on credit to pay off next month, thus reducing the planned debt-repayment amount by what I had to charge this month, raiding my TFSA when something happens that isn’t an emergency, but still didn’t budget for it kind of thing).
Thoughts?
January 13, 2010 at 10:51 am
@ Michelle – I would forget immediately thoughts of saving into an RRSP if you are carrying consumer debt. Getting a 6% (at best) return on your RRSP is worthless if you’re paying 12% (or higher) on expenses.
Secondly, I think you are on the debt treadmill – paying some debt off, but incurring more. Reduce your debt payments, but stop incurring more debt too! That’s crucial. As Gail says, if you spend more than you make, you will never ever get out of debt. She also talks about this in a different context, where she says she meets people all the time who are scrambling to pay off their mortgage debt in 5 – 10 years, but are putting food on credit cards – and what insanity that is!
@ All: I think one thing to consider in all of this RRSP consideration is what your fees are. Not just straight up fees, but MERs, DSC, etc. If for instance you are paying 1% in MER for an equity fund with a historical return of 10%, then you will pay 10% of your total return in fees. If you are paying 1% in a bond fund, with a historical return of 5%, then you are paying 20% of your total return in fees. Consider the average MER in Canada is 2.5%, and you get the impact.
January 13, 2010 at 10:52 am
Michelle: If you can’t buy necessities, you either need to redefine necessities and make do with what you have a little longer, or fix your budget. Gail’s budget is pretty clear that you need to account for necessities, and things do have an actual lifespan outside of fashion. Since I don’t know what qualifies as “when something happens”, I don’t know how strict you are being with yourself.
But, why jump straight from 1-1.5 years to 2.5 years. There are points on the time-line in between.
I understand the logic behind Gail’s assertion that you need to develop a savings habit, but since you are using your TFSA as a source of cash to cover expenses as they come up anyway, why don’t you just go whole hog and put it right on your debt? If you keep going the way you are, it’s not going to be there in an emergency anyway.
I think you are in an area of judgement call. Do you feel more comfortable extending your debt repayment timeline to give yourself breathing room, or can you renew your determination, put-up-with for another year or so, and then exhale? Either way, you are paying down your debt, and that’s the important thing.
January 13, 2010 at 11:29 am
I was just discussing the needs of retirement with my mother and mother-in-law just yesterday, so this blog message is very timely for me.
In our situation, my hubby and I both have secure pension plans through work, which (if we get what is predicted) should equal about 60% take-home of what we take-home today. We are 23 years away from retirement so it’s hard to know if that amount (plus whatever CPP and OAS is available at that time) will be adequate for our retirement needs. In retirement we plan to have a simple lifestyle – staying home mostly, with day-trips here and there, but no fancy, expensive vacations.
I don’t want to put hundreds of thousands into RRSP’s if our pensions will cover our lifestyle needs in retirement but I also don’t want to fall short. At this point I think I will split my savings by putting most of it into our TFSA’s and putting any surplus into RRSP’s. It’s hard to imagine what our money will buy in 20 years, let alone 50 years, assuming we have a 30 yr retirement before moving on from this world!
January 13, 2010 at 11:32 am
Home Buyers Plan withdrawals have been increased to $25,000 since January 2009, according to cra-arc.gc.ca. I believe the withdrawal room is for each person, if you each have RRSPs, and both names are on the house title.
RRSP information is great. I would also love to see RIF and RIF withdrawal information — rules etc and which financial institutions are better — some banks allow immediate withdrawal when converting from RRSP to RIF, some want you to wait a year; some banks give you the same interest on GICs on the money not withdrawn, some decrease all the interest when you make a withdrawal. I’m sure there are more disappointments to be learned. And how easy it is to move a RIF to another institution; will all banks absorb fees; how long does it take to move — how much interest is lost. And it’s almost impossible to track interest and withdrawals if more than one year’s RRSP GIC is in the same RIF. Can you have twenty RIFS? And maybe take the minimum from each? Also I just saw on the RBC site that you can reconvert a RIF back to an RRSP — is this true?
January 13, 2010 at 12:02 pm
I’m definitely an RRSP contributor as I don’t have a company pension plan. I’m diligent and try to max out every year. Government plans (OAS and CPP) will only keep you just barely above the poverty line, even living a very frugal lifestyle in retirement. Unfortunately, with the market meltdown, I (like most) took a huge hit but have recovered well. I’m more pro-active with managing my accounts and keeping tabs. I have some time, but would say I’m tending towards a more balanced portfolio, with low to moderate volatility in the funds I hold. This works for me and doesn’t keep me up at night. As my company matches up to a maximum of 5%, I’d be foolish to not at least contribute the 5%. They only match up to what the employee contributes (you put in 2%, they only put in 2%).
January 13, 2010 at 12:39 pm
@chubby bunny – Thinking of you today and hoping it all goes well. Good luck!
I’m 30 and have about $12,000 in RRSPs despite spending all but one year of my adult life in post-secondary education (co-op education and scholarships saved my butt). My husband has about $15,000. I have been gradually moving mine from a set of rolling 1 year GICs (staggered 3 months apart to even out interest rates) into an index tracker fund, though I did just put some into ING’s 90-day RRSP GIC at 3% to take advantage of that. I figure I have 30-35 years to go, and if I keep up a reasonably steady pace, I’ll be in good shape by that time. My husband is considerably more risk averse than I am, to the point where I worry that his investments will in fact lose money in real terms. I’ve tried to get him to read up on the subject, but it’s like talking to a brick wall. I think he got spooked when his parents’ RRSPs took a big hit over the last couple of years, as did the investments he inherited from his grandmother which are intended for a house down payment when we return to Canada.
On that note, we both work overseas right now, and are taking advantage of the UK equivalent of the TFSA for now – it is quite a generous limit and is about to be increased in the coming tax year. When I start my new job next month we will both be transferring money once a month to our Canadian RRSPs (this has the added benefit of smoothing the currency exchange). Despite the lack of tax advantage here, it means we can use those contributions and our built-up RRSP room (from student days) to lower the tax burden when we move back.
January 13, 2010 at 12:47 pm
I’d like to respond to Z’s question about how to invest. I’d recommend he/she review the Canadian Moneysense magazine Couch Potato Portfolio. The basic premise is that you only need 30 minutes per year to manage your portfolio and by minimizing the expenses (by not actively trading and avoiding mutual funds with high management expense ratios) you can beat 80% of the mutual funds.
Check out: http://www.moneysense.ca/2009/12/17/the-complete-couch-potato-roadmap/
or do a google for Couch Potato Portfolio.
January 13, 2010 at 1:22 pm
@Geoff – I agree with every one of your points. I don’t think investing in RRSPs while you are trying to pay down a whack of consumer debt is such a great idea. Ken H offers a great solution to high-fee investments like mutual funds. The Couch Potato Portfolio is a great way for even novices to invest on their own with significantly lower fees.
Still, don’t forget that ETFs and index funds expose you to market risk (whether it’s the stock market or the bond market) and you need to think about how much of your savings you want to allocate in those areas. You can also put some of your money in cash investments like high interest RRSP savings accounts or, like Alison, GICs. That 90 Day ING RRSP GIC is a great deal!
January 13, 2010 at 1:23 pm
Ditto on the Couch Potato Portfolio. Ive changed my RRSP/mutual fund portfolio to this about 9 months ago, and have entirely recuperated from all my 2008 losses. I did not panic like a lot of people did, because Im 17 years away from retirement, and my risk tolerance is greater. I feal sorry for the people that pulled out early, and by this fact did not leverage the stock market gains last year.
January 13, 2010 at 1:25 pm
Michelle :
Those are the signs that your budget requires readjusting. You gave one budget a try but it does not allow to get ahead with paying off the debt. It’s time to readjust and redefine needs and wants (some cclothes are needs and some are wants. Follow the main guidelines on percentages and see if you can come up with something that is sustainable. I keep 2-3% of my net income from being assigned every month. This gives me some room to work in my expenses without changing my other payments. I also have a list for each month of the non-regular expenses that show up. The list gets longer every year… it just shows that I forgot some expenses but I can put themin my budget better next time around.
January 13, 2010 at 1:31 pm
Marie has stated the golden rule. Budgets need to adjusted on an ongoing basis, to be of any use. It is especially hard to plan for the variable expenses. No matter how hard or acurately you plan, unplanned events will occur and rquire you to tap into the “emergency fund”.
January 13, 2010 at 1:35 pm
I’ve got $4500 in a group RRSP (not a lot, but I’m 23). I have my employer deduct from my pay each month and put it in the group RRSP plan. We used to have RRSP matching, but that went out the window last month due to the recession. I’m still keeping up my end of the bargain, though, because the fees are significantly lower than anything I could get on my own for comparable investments.
The only problem is that there aren’t a lot of investment options in the plan, and even fewer options that are as aggressive as I’d like to be given that I have 40+ years before retirement. I like to use index funds, but in order to spread my money around, I have to use a couple of actively managed funds too, especially for international investments. But I’m not stressed about what I invest in; I’m not trying to beat the market, and my time horizon gives me a lot of leeway. My investments don’t have to be perfect.
I check how my group RRSP is doing once a month, and I’ve adjusted my investment mix once in the past year. I’m pretty passive in my investing otherwise. What I really want to do this year is open a TFSA (this week, in fact). I wonder if I could still use the ‘09 contribution room? I’ll ask when I open it.
January 13, 2010 at 2:11 pm
Rebecca, if you haven’t contributed to your 2009 TFSA, this “amount” gets added to your 2010 $5000 limit. The limit would then be $10,000 for 2010.
If you contributed $1000 in 2009, then you can contribute $9000 in 2010.
If you contributed $5000 in 2009, then you can contribute $5000 in 2010.
January 13, 2010 at 2:34 pm
FYI:
I got my hand slapped by the CRA last year because I assumed RRSP contributions made between January 1 and February 28 can be claimed for either prior year or current year. Ah, not so. Contributions during the first two months of the year are now for prior year only. So, no one can buy RRSPs for 2010 until March 1, 2010.
On Monday, my banker said she wasn’t made aware of this change, but I’m not the first client to mention it to her.
January 13, 2010 at 2:39 pm
Correction: 2009 contributions deadline is March 1, 2010 because of the weekend, so 2010 contributions start March 2, 2010.
January 13, 2010 at 3:02 pm
For those wondering about stack market investments versus GICs and savings accounts there is the rule of thumb to take your age as the percentage of your portfolio that should be low risk investments (GICs). ie if you are 30 then 30% should be low risk and 70% higher risk (stocks are what is usually mentioned), then as you age you sell some of the higher risk stuff and start buying the lower risk. The logic is that when you are younger you have time to ride out the stock market’s fluctuations before you need the funds for retirement.
What happened to too many people is they were chasing the higher rates in the recent boom times and now don’t have the time to recover the losses before they plan to retire.
I also recommend the couch potato method — it is really pretty simple and the fees on the ETFs are so much lower than traditional mutual funds.
Also, if you do invest in the market remember not to watch every increase or slip and hyper-analyze it — if you are investing for 20-30 years a one year downtown will be a small blip on the total portfolio at the end.
For the person worried about losing the real value of the investment if their husband is too conservative, the rule of thumb is inflation runs around 2% (GoC target), so take your average interest rates you have been getting for the life of your RRSP and subtract 2, if it is close to zero or negative then you aren’t making any money.
January 13, 2010 at 3:03 pm
Ann; that doesn’t seem right to me? You can hold your RRSP receipts for future claims (ie; several years later) so how can they penalize you for not claiming your contribution? Do you have a link or something that indicates when this changed?
January 13, 2010 at 3:03 pm
@Ann – thanks for the info. That’s stupid. Probably true, but still stupid. What if I file my taxes in the beginning of Feb, and then come into some $$ and make a contribution towards the end of the month? Then I have to file for a reassessment, I guess. Another hoop?
January 13, 2010 at 3:31 pm
Ann:
This is new to me. I always you can contribute, state that you contributed, but could wait until your request your refund.
Schedule 7:
Line 3: put your contributions for January and February of 2010
Line 10: Select the amount you wish to claim for 2009
Line 13: amount claimed
Line 14: amount contributed that you can claim in a future income tax statement.
If you claim ALL you contribution, line 14 iz 0.
January 13, 2010 at 3:31 pm
My husband will be getting around $10,000 in a bonus this April. We are $42,000 in debt. We were thinking of putting half in RRSP’s to save on the amount of taxes they will deduct; $1200 in Vacation fund so that we can take the $100 we are currently saving a month for that and put $50 in our now empty medical fund (glasses and chiro) and $50 to add into car repairs (we need new tires this year); $1000 in a baby fund (I’m due in April); and the rest in debt repayment –maybe $1500 after taxes if we are lucky.
Do you all think that we should do that or put more onto debt repayment (we are currently on a 3 year program to pay it all off and are paying 20% to it)?
January 13, 2010 at 3:35 pm
Schedule 7 specifies:
“Only complete this schedule and attach it to your return when one or more of the following situations applies:”
[...]
“You will not be deducting on your return for 2009 all of the RRSP contributions you made from March 3, 2009, to March 1, 2010.”
Did you forget to send in Schedule 7?
January 13, 2010 at 3:37 pm
@ Stephanie – what’s your interest rate on that $42 Large, and will $5000 in rrsp contributions drop your husband down to the next tax bracket? If the first answer is higher than 10% and the second is no, then it seems to me to pay off the debt first is the best.
January 13, 2010 at 3:39 pm
Stephanie:
Youy baby fund, car fund, and your medical fund need a boost, not your vacation fund.
January 13, 2010 at 3:48 pm
@Stephanie – that sounds fairly sensible to me, but it really depends on the tax situation. Look at how much you would save on the tax compared to the interest you are paying on the debt. Try plugging in various numbers for X in the following:
1. How much tax would you pay on an extra $7800 of income if you deduct $X from the RRSP?
2. Over the whole term of your debt repayment plan, how much interest would you save if you put $7800 minus $X on the highest interest debt?
I am assuming here you keep the $1200 for vacation and $1000 for baby out of the equation, so you will definitely be paying tax on these amounts. Work out the point at which you minimize the amount of tax and maximize the amount of interest saved.
Even though your tax rate may be as high as 29% (plus provincial tax), it’s a one-time hit. The interest on your debt, even if it is low, can often accumulate enough to match the tax savings amount.
January 13, 2010 at 3:52 pm
Alison, Stephanie. That is why I find the what-if-scenario offered by those online tax filing software services are a great tool to determine the right allocation here.
January 13, 2010 at 4:02 pm
@DanielC – yes, the online tax software is great for determining the first part of the equation, but you’ll have to calculate the interest paid on the debt using Excel or something (maybe even paper & calculator!?).
January 13, 2010 at 4:17 pm
Thank you both! I totally get that the vacation money is silly but it keeps my husband happy enough with our very tight budget and his $20 a week allowance
January 13, 2010 at 4:32 pm
There are several online calulators for calcluing debbt costs that I like to use.
Here’s two of them …
http://www.creditcanada.com/debtCalc.asp
http://cgi.money.cnn.com/tools/debtplanner/debtplanner.jsp
January 13, 2010 at 4:34 pm
Other calculator:
http://www.inchargecanada.ca/Credit_counseling/Resources/Calculators/DebtRolldown.aspx
January 13, 2010 at 5:03 pm
I think Stephanie makes a good point: all work and no play makes jack a dull boy (and for those of us who’ve seen the Shining, it makes jack go dull/crazy). I think we need to know we’re working towards something. I don’t think just because you have debt that you should stop drinking, stop going out, etc and join the cloister, but definitely have to make choices. Hesiod in the 700 BC said “moderation in all things” which I think is good advice today.
and CB — I really hope today went well for you and your kids.
January 13, 2010 at 5:26 pm
CRA changed the rules a few years ago regarding RRSP contributions during the first 60 days of the year. My husband contributes quite a bit so we are now forced to wait until the end of March to file our income taxes, or else we cannot take advantage of the deduction (with filing a re-assessment). I’m not sure why the rules changed.
January 13, 2010 at 5:28 pm
Sorry – I mean “WITHOUT” filing a re-assessment.
January 13, 2010 at 5:37 pm
Stephanie:
I did not say to stop contributing ot the vacation fund (although I wanted to, I’ll admit to that). I just said that it did not need a boost. Just make sure that you have money for car maintenance costs that will pop up. You know about the tires and are doing something about it, good. I just hope you have money set aside for mystery car repairs.
January 13, 2010 at 5:39 pm
Christy:
Do you need to wait until you get all your receipts so you can fill out Schedule 7 or is there another requirement?
I apologise for my BAD typos today!
January 13, 2010 at 6:33 pm
Marie,
I think schedule 7 is only if you are reporting that you made contributions, but you are going to use them as deductions in that year. (You are going to carry them forward.) We have always used the deductions, so I have never filled one out. (Someone correct me if I’m wrong!)
January 13, 2010 at 7:57 pm
@Ken H: I too enjoy reading MoneySense. It’s one of my favourite magazines and it’s nice that it’s Canadian. The latest issue I read had an interesting article of the amount of money that you would need to retire depending on your lifestyle.
For a couple that had always paid max CPP but never saved another cent – they would still receive about $30000 between the two of them from government plans. Enough for a very basic retirement.
For a more moderate retirement (with no pension plan) – they estimated needing anywhere from $250 000 to $750 000.
The premium retirement would need $1.75 million.
Moneysense pointed out that government employees have the most lucrative pension plans. They may earn less while working, but they’ll have more in retirement.
It was an interesting article.
ChubbyBunny: Hope everything went okay today.
January 13, 2010 at 9:12 pm
@chubby bunny~ I was sending you good vibes right on 1400 hours!
I’m going to print off this blog and give to hubby to read…..
January 14, 2010 at 12:10 am
Ladies,
Way back when, receipts for RRSP contributions made during the first 60 days could be held and claimed the following tax year. Now, you must send in the tax receipts for the current tax year, but if you don’t want to claim the deduction right away, you have to file a Schedule 7.
The CRA web site explains it.
January 14, 2010 at 9:45 am
Ann; Thank you. That was the information that I needed. I will certainly mention it to our accountant that does our business and personal taxes.
January 14, 2010 at 12:30 pm
Thanks all for the advice…my budget is indeed allotting for 100% of my pay cheque, and I do have separate clothing and gifts/entertainment fund accounts along with my TSFA and regular account that has household bills, groceries, vehicle stuff, etc coming out. But in December I’d not built up enough for the ski lessons that we put the kids into, so that had to come from TSFA. Then Jan when the clothing budget had been restarted from scratch as we emptied it for school clothing and winter wear, my 15 year old boots gave up the ghost, so there’s another $150 that went on the cc to be paid in full Feb when clothing account is back to $200 in it again. It’s just the catch up that drives me bananas! I started the “real” fabulous Gail budget in late Aug/early Sept, but if you don’t have the money built up in the month you need it (ie. winter coats for December had to be bought IN December as the kids’ other coats were for mini-thems!), then you have no choice it seems but to use cc and pay off in the following month.
I guess it’s just the frustration of not having the 2-3% cushioned in my budget of non-spoken for cash for just these occasions, know what I mean? Like the school things that pop up for $10-$50 a shot that I forgot would come (milk, pizza, etc that yes, cost, but they save me 1-2 days per week of scrambling before work to figure out what to make my kids for lunch when they’re sandwiched/leftovered out).
K, whine is done. I will revamp said budget to leave some breathing room, and remain diligent about the debt repayment. It’s fatiguing after multiple years of debt repayment, never mind the 3 year debt-fatigue Gail speaks of often!
January 14, 2010 at 10:13 pm
Michelle:
A few tweaks in the budget during the first year is normal. Some during the first few months just to get the ‘constant’ numbers figured out and a few more for the things we forget about. You are learning a lot about where your money goes. My first budget dates to MANY years ago, yet I forget things everynow and then (my oops). That’s why I need that list ( I did not used to have one). Use the next pay increase (if luck lets you have one) as your cushion.
Good luck and hang in there!
January 15, 2010 at 1:58 pm
Thanks Marie, I will revamp a bit as I go through the growing pains. Thankfully most payments are monthly (insurance, cable, etc) and don’t vary much, but a bi-monthly and variable bill just drives me nuts (like water). Why can’t they all just set up equal billing and then charge me an average instead of me having to figure out the average from my 5 years worth of xls files?
Kidding…I’m not really that lazy, and I have tracked my spending for 5 years diligently, just never tracked it in accordance with what was coming in as I was a contractor. Now as an employee, it’s a whole new ball of wax, but it’s good.
January 15, 2010 at 2:05 pm
Michelle; check with your water/hydro and gas company (if applicable) – I would be willing to bet that they could do equal billing if you asked for it.
January 15, 2010 at 9:38 pm
I’ve made a simple list of “Money In” and “Money Out” and my budget works perfectly. I make the mortgage payment (accelerated), property tax payment, boat payment (accelerated )and car payment(accelerated). I put $50 biweekly into RRSP’s (on top of the 6% of my gross income I contribute to my employer’s retirement plan because they then put 3% of my income in). I put $100/month into my son’s RESP because paying for his education is important to us. I’ve got $10 biweekly for fun money, $80 biweekly for house and car repairs and $5 biweekly for other emergency (k, it’s a pittance but also offset by the house and car repair account). I also pay daycare costs. I have $40/wk for gas money and a coffee night out with the girls. I also pay the life and disability insurance. My bank accounts are nicknamed in online banking to keep me feeling good about seeing them grow and every penny of my money is accounted for. I have such a great feeling of liberation knowing my finances are well taken care of. Now I’ve just gotta worry about what my husband is doing…….
January 15, 2010 at 9:39 pm
Oh, and I almost forgot. Thank you Gail for your wonderful advice
January 16, 2010 at 5:22 pm
Stephanie:
“My husband will be getting around $10,000 in a bonus this April. … We were thinking of putting half in RRSP’s to save on the amount of taxes they will deduct”
I forgot to remind you of one important thing: RSP contribution room. Check your last tax assessment, line A. Depending on the pension benefits of the position you may or may not have the room to put $5000 in your RSP. If you have no pension and already contribute to the max (and don’t make too high of a gross income), you might be eligible for only $1800 extra contribution.
So if possible to contribute, calculate 18% of the GROSS amount of the bonus. Once you get the bonus, calculate the after-tax amount received, subtract 18% of the gross (for your RSP), and then you will now how much $ is left. You might get another tax return because of the RSP contribution the following tax year (use that to pay off more debt).
January 19, 2010 at 11:00 am
A couple of points
~ as Ann points out, CRA now requires that RSP contributions made in the first 60 days be reported on the prior year tax return even if they are not claimed on that return. If you didn’t do that, then you need to file an adjustment to update the return.
~ right on for those people with good pension plans and not contributing to RSPs. I have so many seniors that do not understand why they owe taxes because of everything being added together which pushes them into a higher tax bracket. Most pension plans can provide you with estimates of your income upon retirement.
~ another point that irritates me about the RSP ads is that some people (mainly sole proprietors) owe taxes at the end of the year and therefore will not receive a refund with which to pay back an RSP loan. You need to remember that the bank financial planner is also a salesperson. You need to think of them in that way.
~ for 2009, you want your combined family income to be below $160,000 (if you live in Ontario) because then you will qualify for the $1000 HST “bribe” the government will be sending out. If you income is slightly over that amount, use your RSPs to reduce your income in order to qualify for this FREE money.
Susan
January 19, 2010 at 12:44 pm
Hello everyone,
I must say, I think that RRSP loans and lines of credit are a wonderful resource tool. For many of us, income and employment just wasn’t stable in our 20s, and this means that catching up is the only way to move forward in our (in my case) 30s.
I started a readvanceable rrsp loan a couple of years ago – generating huge tax refunds each year which I’ve used to pay of high interest debt. The rrsp loans themselves are at historically low interest rates (3.25) – hardly anything to worry about.
Besides the tax savings and the debt retirement options they provide, they also help people build their credit. We’ve all heard that credit scores don’t look kindly on those who only have credit cards in their portfolios – so loans or lines of credit that are rrsp make sense.
Ideally, of course, we’d all do monthly payments, but sometimes loans are the best way to ensure you pay yourself first.
January 19, 2010 at 12:51 pm
Julian:
If you are catching up, you can use a regular RSP payment and fill out a T1213 form for reduction of taxes at source. That way, you can you your increase in your pay to pay up you high interest debt year-round instead of just waiting for the Spring.