The RRSP is a long-term investment vehicle that’s generally used for retirement purposes. You probably already know that, but here are some questions about RRSPs for which you may not have known the answer.
Katherine Al Haddad, Director of our Laval Financial Centre, answers frequently asked questions from her clients.
1. How does the RRSP work?
When you invest in an RRSP, you reduce your taxable income, so you pay lower income tax for that year. When you withdraw money from your RRSP, you increase your taxable income, so you pay tax on the amount withdrawn. This is a tax deferral strategy.
2. At what age should I start saving?
Do it as early as possible. Much less effort is involved if you start saving at age 25 than at age 40. That said, it is never too late to start saving.
3. How much should I invest in an RRSP?
To figure out how much money you’ll need to save, you must first determine your retirement goals. Then, once you know how much income you will need, you have to consider the various sources of income. A financial security advisor will be happy to help you come up with a detailed retirement plan.
4. How should I invest my money, given market fluctuations?
Invest based on your investor profile, which your financial security advisor will help you determine. Once you have an established investment strategy, stick with it, even if the value of your investments fluctuates. People who maintain their strategy experience better portfolio growth.
5. What’s better for me: an RRSP or a TFSA?
When determining which investment vehicle best suits your needs, you have to consider three factors: your current income, your anticipated retirement income and your savings objectives. If you’re earning a high income during your career and expect to have a much lower income in retirement, it will be to your advantage to invest in an RRSP. The opposite is also true: If you have a low income as an active member of the work force and you also expect to have a low income in retirement, a TFSA is a better option for you. A TFSA is also a better option if your savings objectives are for specific projects, rather than retirement.
6. If I reduce my taxable income by investing in an RRSP, I will be entitled to a tax refund. What should I do with it?
Most people use their tax refund to buy things or pay for a trip. However, it would be wiser to invest the money in an RRSP or TFSA. It is also a good idea to use it to protect yourself in the event of a critical illness.
7. When will I have to withdraw my RRSP savings?
It all depends on your financial situation and your needs. You may have to withdraw RRSP funds before retirement, just as you may be able to wait a few years after retiring to withdraw the funds. The important thing is to come up with a retirement plan and a disbursement schedule in discussion with your financial security advisor.
8. What’s an effective way to manage family wealth?
You need to have a progressive disbursement schedule to prevent it from all going to taxes. If the beneficiaries are children and there is still too much in RRSPs, half the money will go to taxes. You need to schedule slow disbursements to reach a lower tax rate and prevent the funds from all being liquidated at the same time. If an RRSP holder is determined to bequeath a specific sum to children, it would be preferable for them to purchase Life insurance, which will be paid net of tax.
9. What is a spousal RRSP?
It’s an RRSP to which a spouse makes contributions in order to benefit from a tax return. However, the RRSP becomes the property of the spouse who is the beneficiary of the contribution. Consequently, the beneficiary spouse is the one who will pay the income tax on withdrawal. This strategy is a good one when one spouse has a much higher income than the other, as it allows the couple to reduce the tax impact.
10. What happens in the event of death or divorce?
In the event of death, an RRSP can be rolled over to the surviving spouse in accordance with the tax rollover rule, and the RRSP will not be deemed to have been sold. There is no tax consequence. If anyone other than the spouse is indicated as a beneficiary, the RRSP will be deemed to have been sold on that day, and income tax will be payable on the total disposed RRSP amount. Market value will be added to the deceased’s income for the year of his or her death.
In the event of divorce, the RRSP will be split in the same way as the other assets that make up the family wealth. The RRSP value must be divided, so the amount can be paid other than by liquidating the RRSP, so that there is no impact on retirement income.