RRSP tax tips and Pitfalls
Tax Tips are plentiful but some are promoted by those that benefit from selling RRSPs
1) Don’t automatically use RRSPs because every bank and financial firm advertises them. They are great for some people, but not so good for others.
2) Capital Gains are taxed at 50% outside and RRSP, they are taxed at 100% when withdrawn from an RRSP.
3) Dividends are taxed at 100% rate when withdrawn form an RRSP. You lose that tax advantage.
4) Should your stocks or mutual funds drop in value inside an RRSP you cannot claim a capital loss.
5) Contrary to all marketing advertisements and advice – Don’t start an RRSP until you are age 35 and have at least $35,000 saved elsewhere. Why? Because many people choose to buy a company or start up their own self employment in middle age. Banks may not lend money to a new start up with unproven track record. When people use their RRSPs before retirement it can cost them huge tax penalties.
6) Open a TFSA (Tax Free Savings Account) There is no immediate tax deduction but it is much less painful to withdraw money anytime you chose, without paying taxes.
7) If your retirement income will be low enough to receive guaranteed income supplement do not buy RRSPs. In other words as a rule of thumb, if you won’t have a pension income (other than OAS and CPP) in retirement then don’t save money inside an RRSP unless you will have at least $150,000 at retirement age. Too few dollars in an RRSP will be taxable PLUS it will cost you an extra 50% off your Guaranteed Income Settlement. That’s correct – for every dollar you earn you’ll lose fifty cents from next year’s GIS. The website states for every $24.00 increase in income you lose $1.00 a month next year – it doesn’t sound so bad until you figure there are 12 months that you lose that income.
That is an extra 50% tax that they wouldn’t pay if that money was saved outside an RRSP. This is a scheme that our Canadian government uses to extract money from our senior citizens in the lowest income categories.
8) RRSPs are great for many people, so don’t ignore them – just be aware.
9) If you are one of the people who will benefit from RRSPs maximize your limits. The longer the money is in the plan the more tax free growth
10) If your retirement income will be in the neighbourhood of $75,000 a year you will be taxed an extra 15% until your Old Age Security benefit is totally gone. If you income is over $130,000 it won’t matter because your OAS will be all gone.
11) Hold fixed income investments inside your RRSPs as interest is taxed at 100% either in or out of an RRSP. No disadvantages there.
12) Got money in RRSP and have equity in your home? You may qualify for a great tax program of holding your own mortgage inside your RRSP. Banks and Financial companies won’t volunteer information on this as they stand to lose too much money. How can they make money on a mortgage if they don’t sell it? And how can they make money on products inside your RRSP if they don’t sell it? We can help. For more information download my book on ‘Myths about RRSPs” This feature may no longer be available.
13) If you are satisfied you are the right person for an RRSP and you have a higher income than your spouse, that to your adviser about a spousal RRSP. It is a way of income splitting for tax advantages. The goal is to have about even retirement income.
14) Avoid RRSP loans that can’t be paid off with your tax return. The interest is not tax deductible like it would be to borrow money to invest outside an RRSP. If you are going to borrow to invest consider tax advantages of NOT using an RRSP
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