Taxes & RRSPs

February 2018

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P2 THURSDAY, FEBRUARY 1, 2018 SPECIAL SECTION 1.800.264.2926 IN VEST FOR TOMORROW 2.55 % RSP TFSA RIF *rates subject to change without notice VARIABLE RSP | RIF | TFSA * 1.800.264.2926 & TAXES RRSPS ' T he key thing to remember with an RRSP contribution is that you're creating savings for your retirement," he says. "First of all, we have to find out the amount that you're able to save. That number then forms part of the calculation to figure out the best way to use those dollars to reduce your taxable income." He suggests setting up monthly contributions so there's no rush to meet the deadline, which is always the 60th day of the new year. This year's deadline to contribute to your RRSP for the 2017 tax year is coming up quickly on March 1. After you figure out the amount you're able to contribute, then you need a strategy. "Are you a high income earner? Do you have a corporation? Do you have a business and are able to keep your income low? Do you have a strong pension?" Tétrault asks. "These are all questions that factor into whether or not you should be making RRSP contributions." An RRSP contribution reduces your taxable income by the amount of the contribution. So the younger you are and the higher your tax bracket, the more likely an RRSP contribution will make sense for you. "Usually we look at a household as a business and we'll advise how to use the savings to reduce your tax bracket," Tétrault says. "For most Manitobans and for average Canadians, the RRSP contribution makes sense. It's an easy way to save, and you're going to need the money at retirement anyway." When you retire and start pulling money out of your RRSP account, it is then fully taxable as income — usually in a lower tax bracket. "Generally it works out well because you make money when you're in your 40s and 50s," he says. "When you retire, you stop making that salary and you draw on your RRSP to fund your lifestyle for you." Although RRSPs make sense for the majority of people, it's not the best choice in all circumstances. "The people who should consider alternatives are those who have corporations and are able to shelter some of that income through their corporations," Tétrault says. "They should look at leaving the money in the corporation and growing the assets of the corporation as a retirement vehicle. Certainly, they should consult their accountant because there have been tax changes and it's different for everyone." People who earn a low salary or who are close to retirement might want to consider a Tax-Free Savings Account, or TFSA. A TFSA is also a good option for people who need liquidity or access to capital, Tétrault adds. "Remember, an RRSP is not liquid. Once you invest in an RRSP plan, it's basically locked until you retire because if you pull it out, you pay tax on it," Tétrault says. "If you put it in a TFSA, you're not taxed or penalized when you pull it out, so the entire amount acts like a rainy-day fund. Liquidity is important for people. You want to have your assets invested but you also want to have access to cash, so a TSFA is perfect for that." No matter what your financial situation might be, Tétrault recommends setting aside some portion of your investments in a TSFA. "Instead of keeping your money at the bank doing nothing, you could now have $57,500 in the TFSA," he says. "That's a lot of money that you could access on a whim without having to worry about tax consequences." He also suggests seeking the advice of a financial expert, who can provide details on everything from spousal RRSPs to the Home Buyers' Plan. "You should at least do the math and talk to an expert," he says. "Pick up a phone and talk to someone and you'll get your answers. This is what we do." MAKING YOUR MONEY WORK FOR YOU BY JENNIFER MCFEE Rob Tétrault is senior vice-president and portfolio manager for the Tétrault Wealth Advisory Group at National Bank Financial. Whether you have a little or a lot to invest, it's most important to start saving now for your retirement. Rob Tétrault, senior vice-president and portfolio manager for the Tétrault Wealth Advisory Group at National Bank Financial, has a few key tips to help you boost your knowledge — and your savings. After you figure out the amount you're able to contribute, then you need a strategy. I t all depends on your personal financial situation, of course, according to Jim Kort, Winkler-based Director of Wealth Management at Access Credit Union. But let's say you're making an annual salary of $45,000, which in Manitoba puts you in a combined 27 per cent marginal tax bracket, giving you a 27 per cent tax break with your RRSP contribution. But if you take that money and put it into a TFSA instead, you can grow your investments tax-free until you're in a higher tax bracket — about 45 per cent if your salary bumps up to $100,000 in a decade or so. "You can then withdraw it and make your RRSP contribution at that time, giving you more bang for your buck when it comes to tax reduction," he said. TFSAs started off with annual contribution limits of $5,000 in 2009. It has moved around a little over the years — for example it was raised to $10,000 in 2015 and reduced to $5,500 the following year — but essentially, Canadians have built up $57,500, as of January 2018, in tax-free room with TFSAs. Kort believes many investors need to educate themselves about TFSAs so they can truly understand their power. "We've been really quick to rush to our financial institution to make our RRSP contribution but we've missed the opportunity to talk to an adviser about whether RRSPs are suitable for our own circumstances," he said. There are three things to consider: your tax bracket today and what you believe it will be when you retire, how much you have in your RRSP and whether you're going to see your income drop before you retire or if you want to retire early and your government benefits in retirement — a low- income family might qualify for guaranteed income supplements, which the government pays on top of old age security. An RRSP would negatively affect this supplement. "If you're in a higher tax bracket today, there is a good possibility your tax bracket will be lower at retirement. Then it makes sense to utilize an RRSP strategy before using the TFSA strategy," he said. Access has a network of 17 branches across southern Manitoba, nearly 50,000 members and $2.4 billion in assets under administration. Kort said it's important for investors to realize that an RRSP contribution needs to be driven by more than a catchy marketing campaign. "Ask yourself the question, 'why am I doing this?' Do you know what it's doing for you in the long run? That's an important step and it's often undervalued. You make your contribution by the deadline but we don't understand how the RRSP can make us successful when there are so many other vehicles out there," he said. Retirement planning can get kind of tricky, which is why Kort — and virtually every other person in the financial services industry — recommends working it all out with a qualified financial adviser. "So many clients in their 50s are wondering, 'how in the world am I going to replace my employment income with my savings?' Tackling this question early on in life will help you determine whether an RRSP or a TFSA is the most suitable option for you. Some clients make the RRSP contribution and when they get the tax refund, they put it in the TFSA. You can get quite creative," he said. So speak to a financial adviser now to make sure you're squarely on target for your retirement's financial goals. MORE BANG FOR YOUR RETIREMENT BUCK BY GEOFF KIRBYSON This RRSP season, take aim at your retirement savings with both barrels. Tax-free Savings Accounts (TFSAs) have been around for less than a decade but when used in conjunction with your Registered Retirement Savings Fund (RRSP) — a vehicle created more than 60 years ago — they can be a powerful combination.

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