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RRSP12013 Taking responsibility for your retirement

By Garry Marr Postmedia News
ed by private pension plans declines and the age to collect old age security will be increasing for many now in the workforce, we are saving less, not more. The key debate this year seems to be whether to pay down debt or make that RRSP contribution. Household debt to income all debt divided by after-tax income reached a record 164.6 per cent in the last quarter. Canadians listed paying that down as their No. 1 priority for 2013 in a Canadian Imperial Bank of Commerce survey The survey found 17 per cent . listed reducing debt as their top financial priority while only seven per cent picked retirement planning. Two years ago, retirement planning was listed by 13 per cent as a top priority . Credit card debt has a high interest rate by its very nature and its unlikely no matter how well you do in your RRSP or TFSA youll beat [the rate on your debt], says Jamie Golombek, managing director, tax and estate planning with CIBC. Thats probably true of all debt with the exception of mortgage debt, which can be as low as three per cent for some consumers these days. You may want to direct any extra money into a long-term savings vehicle with a higher expected rate of return, said Golombek, adding returns will obviously vary based on the risk you are willing to take on. Its also hard to convince consumers to save, given the poor performance of many investments, says London-based author Talbot Stevens. Returns, regardless of the type of investor you are, for the last decade or so have not been fun. Besides, investors may wonder, who needs a retirement plan if you have a house that has doubled in value over the last decade? Then theres the taxfree savings account now five years old and eligible for $25,500 in contributions over that period a far more flexible vehicle for depositing and withdrawing money . Are RRSPs relevant? Yes, in the sense that people need to save for retirement and generally we are falling further behind, says Stevens. Income security is not as great as it used to be. We need to actually save more. Talbot says how we save is more relevant that ever. For most middle and upper income Canadians, RRSPs are still the way to save, he says. People used to dream about retiring at 55 but since the market crashed,peoplerealizedtheyaregoingto h ave t o work a little bit longer. Still, o u r s av i n g rate has slowed. A Toronto-Dominion Bank study released this week found 15 per cent of Canadians will spend five years or less saving for retirement, even though 69 per cent of retirees wished they had saved for 25 years. Canadians just dont seem to have any money. A poll from the Bank of Nova Scotia released Tuesday found 64 per cent of Canadians cited affordability as a barrier to investing, up from 59 per cent a year earlier. The TD poll found many working

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RRSPS Still Relevant even in age of debt

Is it over? Has the love affair with the RRSP first introduced in 1957, soured , as Canadians turn their attention to fighting ballooning debt? Do they prefer the odds of the housing market to the paltry returns they have seen since the financial crisis? Sure RRSPs are a great way to defer taxes but is our financial literacy sound enough to make sure we make the most of that advantage? Is saving at all taking a back seat to the prevailing advice to pare down debt before interest rates rise? The RRSP was first introduced as the governments plan to help us save for our own retirement and supplement the Canada Pension Plan but today the overwhelming majority of Canadians fail to make full use of the fact they can contribute up to 18 per cent of their previous years earned income. The latest information from Statistics Canada going back to 2011 shows only about six million Canadians made an RRSP contribution. The amount of unused RRSP contribution room is now over $500-billion. So even as income security provid-

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Canadians have c o m e to grips with the new reality with , 36 per cent planning to work until after 65. Another 16 per cent of Canadians plan to work into their 70s. Talbot says there remains a fundamental problem with the RRSP namely many people seem oblivious to the fact the money will eventually be taxed. People are not investing as much as they think. If you take $1,000, and keep the math simple and use an outdated 50 per cent tax bracket, that $1,000 needs to become $2,000 in the RRSP he says. ,

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Draining RRSP funds before retirement can result in immediate financial penalties and a potentially taxing financial future, financial experts say . Everything Canadians traditionally rely on, [including] government and company pensions, are becoming negatively effected, so its more important now to have RRSPs and to plan for retirement, said Hasan Naqvi, investment sales manager, BMO Financial Group, Saskatoon. And people are living longer so they need their savings to last longer. When you take money out of RRSPs before you retire, you lose taxes, compounding and investment income. Early withdrawals result in a withholding tax and a loss in RRSP contribution room that cannot be recovered. Youve lost tax-sheltered compounding because you withdrew that money says John Haliburton, senior , associate manager, Sun Life Financial in Edmonton. Now you dont have the ability to put that money back in and that growth is no longer there. Despite the best advice of financial advisers, there has been a rise in the number of Canadians diving into their RRSP accounts. A Scotiabank

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By HiMani EdiriwEEra Postmedia News
survey shows 36 per cent of holders withdrew funds in 2012, up from 23 per cent in 2005. Forty per cent withdrew funds to buy a first home, 16 per cent used the money to pay down debt and 14 per cent withdrew money to cover day-to-day expenses. A significant number of people feel its necessary to deplete their RRSPs for emergencies or after the loss of a job leaves them with no income and bills to pay. Then you have to take money out of your RRSPs even though you get taxed and there are consequences for it, says Naqvi. Another common reason is to pay off debt, he adds; under these circumstances, some people decide its financially and psychologically worth the penalties to start over. There are positive reasons to take money out of an RRSP account and the most popular one is the Home Buyers Plan (HBP). The HBP acts as an interest-free, 15year loan that allows first-time homebuyers to withdraw up to $25,000 from their RRSP without penalty A married . couple can withdraw $50,000. To qualify buyers must meet HBP conditions, , including not having owned a home in the past four years and not having an existing balance with the plan.

Panos Sechopoulos, CFA, CFP Portfolio Manager Panos Sechopoulos Wealth Management 519-252-3645 | 1-800-265-0890 panos.sechopoulos@rbc.com www.pswealthmanagement.com

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rBC financial planning consultant Sandra abdool is seen here in her Burlington, Ontario offices.
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Wednesday, January 30, 2013

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The Windsor Star windsorstar.com

RRSP has advantages for young workers

By Karen Paton-Evans Special to The Star Back in 1994, when Steve Deneau and his wife wanted to move out of their rental place and purchase their rst house, they took a hard look at their nances. After an acquaintance in the nancial sector mentioned the federal governments Home Buyers Plan that enables rst-time homebuyers to borrow from their own Registered Retirement Savings Plans, Deneau realized they could start house hunting. The Home Buyers Plan was enough to get me over the hump, factoring in legal fees and the down payment on my wifes and my rst home, he remembers. With a baby on the way, the couple appreciated having 15 years to repay what was essentially a loan they gave themselves. It helped out with cash ow, which is really important when you are younger, says Deneau, VP of Business Development at Windsor Family Credit Union. If it wasnt available to me, I probably would have rented for another several years. Who knows how much longer it would have taken me to enter homeownership? Deneaus experience indicates one of several reasons why putting money away in an RRSP can be a wise decision for young people trying to establish themselves now while preparing for their future needs. The most obvious advantage to having an RRSP is the immediate tax deduction that applies to your current income tax return. Deneau does the math: Most people starting out in the workforce are in the 26 per cent income tax bracket. Put $5,000 into your RSP contribution in one year and the amount of income tax you will be obliged to pay the government will decrease by approximately $1,300. You get your income tax reduced, Deneau says, And the gains you make in your RSP are tax-sheltered till youre ready to withdraw it. Even teenagers with part-time or summer jobs can get a bit of a break when they have an RSP. When a teen earns income that is recorded on a T-4 and then les an income tax return for the rst time, the government will send a statement indicating the maximum amount the young worker can contribute to an RSP. Thats a great time to set up the fund, Deneau says. Even a few dollars put away every paycheque will add up over time. Get into the game early and get into a good habit that will pay off down the road. A big plus is that you are building your own portable retirement fund that is not dependent on your employers pension plan. Not so long ago, the de ned bene t pension was quite common, whereby the employer set money aside in a pension fund and paid out a determined
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Calgary nanical expert Bruce Sellery is co-host of the reality-TV show Million Dollar Neighbourhood. The show is broadcast on Oprah Winfreys OWN network.

Youth face lot to learn

BY JEFF LAGERQUIST Postmedia News

Young Canadians face an uphill battle into uncertain territory when it comes to planning their nancial futures, and they have more working against them than any generation before. We live in an era of instant gratication and an ability to delay consequence, said Bruce Sellery, founder of personal nance training company Moolala and co-host of the reality-TV show Million Dollar Neighbourhood. He says young Canadians are not learning effective nancial habits from their parents and lack a contextual understanding of their money . The solution for educators, he says, is to talk about personal nance in a way that gets young people excited about their futures and builds a motivation to save. Retirement is not an activity its a life stage. , Think about what kind of home you want to live in, what kind of car you want to drive, and the places you want to visit. Who cares if its an RRSP or a TFSA, you just need to adjust your cash ow so you can save more, said Sellery . Paying off student loans and credit card debts before putting aside 10 per cent of each paycheque are the simple yet essential rst steps. Learning the difference between the long-term savings accounts is trivial until you are in the black, but as always planning ahead is a big help. The Canada Revenue Agency says the TFSA is like an RRSP for everything in your life beyond retirement.

When you make an RRSP contribution, you deduct that amount from your taxable income. Your investments build interest, and the federal government stays out of it. However, when you want that money back, those funds are fully taxable. A TFSA is the other side of the same coin. There is no tax deduction when you contribute, but your tax-free earnings are free of tax when you withdraw them. It stands to reason that you want to be taxed when you are in the lowest bracket. An RRSP contribution will reduce your total taxable income. Conversely if your income is low, and you , expect it to increase, save that tax break for later in life. Knowing your habits is an important factor. The exibility of a TFSA can be a liability for the less scally disciplined. The RRSP is kind of like a piggy bank, while the TFSA is more like a change bowl. You are more likely to spend the coins in a bowl than a piggy bank you are going to have to smash, said Sellery . The important thing is not to waste time scrutinizing every intricacy or trying to predict your major expenditures for the next 40 years. You can hold both accounts at the same time, and neither is absolutely better than the other. Its a learning curve. One nancial product is rarely the answer, and diversication is key but , its incredibly important to start while you are young, said Leanne Kotchonoski, a financial planner at Sun Life Financial. Financial Post

amount of money every month to an employee upon retirement. Unless your job is with the government or one of select manufacturers,the day of the de ned bene t plan is in its sunset years, Deneau says. Increasingly, employers are opting instead to contribute to an employees own RSP; some employers even offer to match a percentage of the workers contribution. If your employer makes that offer, Deneau urges you to take advantage of it. Youre giving yourself a raise by showing a bit of discipline in putting away for your retirement, he points out. That money may actually help you launch a new career, should your place of employment downsize or close or you choose to retrain for a different occupation. The governments Lifelong Learning Plan allows you to withdraw funds from your RSPs to pay for full-time training or education for you or your spouse or common-law partner in a qualifying education program in college, university or other qualifying institution. The LLP cannot be used to nance your childrens training or education. The maximum withdrawal is $10,000 in a calendar year; no more than $20,000 total can be borrowed from your RSP. The repayment period is generally 10 years. With so many older workers returning to school for retraining and reinvention, it is interesting to note that participation in the Lifelong Learning Program has to be done before the end of the year that the student turns 71. Considering the risks a worker will encounter as the economy goes through inevitable ups and downs, an RSP can be a useful safety net to cushion a temporary fall. The bene t of this is you have a pool of funds available, Deneau says. Like Deneau and his wife, you may also opt to tap your RSP accounts to buy or build your rst home.The maximum amount that can be withdrawn in total is $25,000, borrowed from either your account or your partners account or both.The money must be repaid within 15 years. Pay one- fteenth back each year, Deneau says. If you dont make a payment, its considered taxable income that is added onto your income earnings for that year. The main advantage of using RSP funds to purchase a home or go back to school is that you have the money, says Deneau. You are borrowing from yourself, so you are not paying interest on a loan to a lending institution. But there is a downside when you remove funds from your RSP, even temporarily. The pot gets smaller and you are going to lose value over time and the potential for it to grow more, Deneau cautions. Although retirement may seem like a long way off to a young worker, some day it will arrive, and you will be glad to have savings to enjoy in your golden years.

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What often happens, he says, is people will put $1,000 in their RRSP and just spend the $500 refund. What that does is turn $1,000 of after-tax money into $1,000 of before-tax money because your refund is blown and now you have money sitting in an RRSP that has yet to be taxed. Fred Vettese, chief actuary of Morneau Shepel, says its easy to see where some people might be spending potential savings. Housing, he says. There are intellectual reasons why [savings] should be dropping, housing has become so expensive so they have to pour all the money into their mortgage. Perhaps thats why Canadians view their principal residence as a key component of their retirement. A Bank of Montreal survey last year found 41 per cent of Canadians are counting on their home value to bridge any retirement shortfall. Cynthia Caskey, vice-president, portfolio manager and sales manager of TD Waterhouse Private Investment Advice, expects the usual crunch of RRSP activity in the rst 60 days of 2013 (before the March 1 deadline) as people try to lower their taxable income for 2012. More people are thinking about saving and have retirement on the brain, she says. The smart birds do it the beginning of the year because [contribution limits are] based on previous years earned income. You already know pretty much at the end of the year what you made during the year. You could actually have it compound for 14 months, she says, acknowledging some people do feel challenged to make contributions and keep their budget in line. Shes an advocate of paying down high interest credit card debt but suggests consumers make their contribution and then use any refund to pay down debt. Financial Post gmarrnationalpost.com Holders ll in the T1036 form on the CRA site and take it to their bank. If approved, the funds appear in their account within three days. The money must be repaid in equal instalments over 15 years or it is applied to income. Despite the tax-free withdrawal that allows $8,000 in compounded savings on the $25,000, it can be a costly decision. Lets assume the client is withdrawing $25,000 and plans to repay it over 15 years youve lost the opportunity to grow that $25,000 in that time frame, said Sandra Abdool, regional nancial planning consultant for RBC in Burlington, Ont. The other side of that equation is the individual has gained the opportunity of home ownership possibly much earlier than they could have had before. SOMETIMES The less frequently REDEMPTIONS ARE used tax-free Lifelong Learning Plan (LLP) NOT MANDATORY allows a withdrawal AND THEYRE MORE of $20,000 an annual limit of $10,000 to FOR LIFESTYLE nance education for the E XPENSES. holder or spouse. The participant must be accepted or enrolled in a full-time, qualifying program at a designated educational institution. Funds must be repaid over 10 years. Abdool urges people to consult a nancial adviser before any decisions are made. Other options, such as a line of credit or tax-free savings account (TFSA), might be less costly in the long term. Using [RRSPs] for short-term goals is not the most efcient use of those assets, she says. Haliburton also believes the TFSA, a complementary or alternative savings account to the RRSP can be a great ad, vantage to individuals who nd themselves in need of additional cash. The annual contribution limit increased to $5,500 this year. People need to have some liquidity The prudent rule is . to have three to six months of expenses in an account and the TFSA provides a vehicle to have a just-in-case, Haliburton said. Naqvi says scal responsibility can shield people from having to make painful choices about the future of their investments. You just need to cut back on expenses a lot of times. Sometimes redemptions are not mandatory and theyre more for lifestyle expenses. Dont put money into RRSPs if youre considering that vacation.
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Panos Sechopoulos, CFA, CFP Portfolio Manager Panos Sechopoulos Wealth Management 519-252-3645 | 1-800-265-0890 panos.sechopoulos@rbc.com www.pswealthmanagement.com
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Publishing Feb. 6