Christmas used to come in February for financial guys. Across a dark, cold nation I would haul my sculpted butt, mincing off an Air Canada flight in some frozen hellhole like Saskatoon long enough to deliver financial enlightenment to the natives. Then back to the scotch, salty cashews and bitchy stews in business class.
But, such changes. Saskatchewan and my rear are still what they were, of course, but “RRSP Season” and its carnal rewards has gone the way of Benny XVI. Contributions in recent years have fallen by more than 50%, mutual fund salesguys can be seen collecting bottles on recycling days in North Toronto and the TV (who watches that any more?) is no longer slathered with happy retirees romping suggestively through Investor’s Group ads.
Over 70% of the people who qualify to do the RRSP thing this year, won’t. Together they have about $700 billion that could be sheltered from tax. As I’ve been spelling out this week, our lascivious lust for real estate has resulted in a massive drop in liquid assets. Now 78% of Boomers own houses at the same time as 50% realize they’ll run out of money long before they croak, and only four in ten have $100,000 put aside. Worse, 72% have no pensions. This really sucks. So, is an RRSP the answer?
For some, sure. And remember the deadline is today (March 1st) to contribute and be able to deduct it from 2012 taxable income. But the fact remains every time you put money into one of these things, you’re making after-tax income taxable again. That’s cool if you believe years in the future you’ll be taking it out again at a lower tax rate. But if you trust what the government’s going to do in thirty years, then I also have a grow-op in Surrey your wife will love.
Still RRSPs do have a role to play in tax-shifting, instead of tax deferral. You can use this vehicle to move tax to a future year in which you’re pretty sure you’ll be slumming, or your family circumstances have changed, when the funds can be removed at a lower rate. There’s also the ever-appealing RRSP mortgage, which can be used to supplant the one the bank gave you. However, in times of cheapo mortgage rates there are better ways to make money.
Well, here are ten things worth thinking about today.
I You don’t actually need money to make a deposit into a registered retirement plan. It’s quite possible just to take assets you have now (that are kicking out taxable gains) and use them to make a ‘contribution in kind.’ So for selling yourself stuff you already own, the government will send you money in the form of a refund. Be aware that doing this might trigger a capital gain if the asset has increased in value.
II One of the most useful things about getting married, other than the free advice on everything, is a spousal plan. If you make more money, contribute to the spouse’s plan rather than yours. You get the deduction, he/she gets the money and after three years can take it out at a reduced rate. That’s called income-splitting. Or, pump up a spousal plan three years before a maternity leave, and let the government finance it for you.
III If you’re terminally horny and can’t help buying a house, at least use the HBP. The rules let you launder a downpayment of up to $50,000 (for a couple) through RRSPs and after 90 days remove it and buy a house. This nets a tax rebate big enough to buy a Miele dishwasher, Wolff stove and Bosch washer/dryer set so your little friends will think you actually have money.
IV Now, be somewhat careful what you put into an RRSP. Remember if you buy stuff like ETFs that may provide capital gains, or preferreds churning out dividends, the tax advantage is lost if you hold them in a registered plan. Everything coming out of an RRSP is taxed as income, at a far higher rate. So stick interest-bearing stuff like bonds in here, and collect the dividend tax credit in your non-registered account.
V Always, always, always have a self-directed RRSP. Doesn’t mean you have to run it – an advisor can do that for you. It just means you’ve prevented TNL@TB from having her way with you.
VI Are you a low-income person and figure you’ll stay that way? Then no RRSP for you. In the true spirit of Greed is Good, these plans give the greatest benefit to the wealthiest people. In fact, it’s been proven that people who retire on public benefits (CPP, OAS, GIC and my favourite, LCBO) are better off never having contributed.
VII Remember that just because you stick money in an RRSP to get it growing tax-free does not mean you have to declare this on your taxes. Why wouldn’t you? Because you might just be getting out of med school and know your income will quadruple in two years – so why not wait and claim the deduction later when the refund will be epic?
VIII Even though RRSPs may be a bad idea for increasing numbers of people, ‘investing’ in your mortgage – like women’s magazines and the CBC tell you – is worse. Nobody should be aggressively paying off a 2.6% mortgage when inflation is 3% and balanced portfolios are handing over 8%. If you don’t want to have F register your nestegg, then just build that non-registered investment account, and lock in your mortgage rate.
IX The biggest benefit of RRSPs, remember, is tax-shifting. That means if you’re planning on a sabbatical, or heading back to school, or going postal and getting fired, that income contributed during a fat year for a fat refund can be withdrawn in a lean one, for minimal tax. Just keep withdrawals to less than $5,000 a pop and the bite will be lessened.
X Finally, if you do make an RRSP contribution, don’t spend the refund this year on something you’ll regret, like a Kia. Instead, invest it in your TFSA.
Or a new Harley.