There are two concepts in saving and investing. Savings implies a commitment to systematic hoarding of discretionary assets. Investing is the concept of hoarding in a manner that sustains optimal growth of such assets. All our clients have bought into the notion of Saving, we help them invest wisely.
RRSP - What does it stand for?
These are containers of qualified investments that permits investment of pre-tax dollars and its tax deferred growth until age 69 at which point you must withdraw it, in a lump sum or systematically via an annuity or Registered Income Fund. (RRIF). A consequence of effective tax planning of your financial affairs generally is the serious curtailment your RRSP tax shelter limit. To the extent allowed, it is on the whole, the most tax effective way to save for the average Canadian.
A Registered Retirement Savings Plan, or RRSP, has met Revenue Canada statute and regulation that allows pre-tax dollars to be used in the plan. The government or Revenue Canada, does not guarantee in anyway, either the capital or the performance of the investment vehicle.
Some common investments in an RRSPs are
- GICs, GIAs
- Mutual Funds
- Segregated Funds
- GICs, GIAs
While you can have unlimited number of RRSP accounts with a variety of financial institutions, there is an annual maximum tax sheltered savings that may be put in an RRSP. It is
- 18% of your previous year's taxable income to an absolute maximum dollar amount. (less pension adjustment)
- For 1997 tax year the maximum is $13,500
RRSPs may be used to shelter from tax retirement savings up to the end of the year in which you turn age 69. At that point you must do one of two things.
- Cash in the plan in one lump sum, or
- convert it to a systematic income plan like an annuity or a RRIF.
One of the criteria of an RRSP qualifying investment is that 80% or more must be in Canadian investments. Each singular investment can be "wrapped" to qualify as an RRSP. An investor can hold many different investment each individually "wrapped" to qualify as an RRSP.
RRIF or Registered Retirement Income Fund is the most popular extension of terminating or maturing RRSP plans. If not redeemed for cash, or converted into an annuity RRSPs typically become RRIFs. RRIF is essentially the same as an RRSP with two distinct differences.
- No new money may be added to a RRIF, and
- a prescribed minimum must be taken out of a RRIF annually
Like and RRSP any money coming out of an RRIF is fully taxed as if it was interest income. The underlying investment of a RRIF can be just like an RRSP.
A LIF is a special income plan that was funded by pension or severance money. The underlying investment can be like an RRSP.
A few or many individual investments can be wrapped into one RRSP plan. This then is called a self directed RRSP or RRIF. The advantages of self directed are:
- One annual maintenance fee
- One consolidated reporting,
- Allows for more flexibility in portfolio design, and
- More flexibility in your Foreign content compliance
Self directed becomes attractive once you have $50,000 or more of investment in an RRSP.
Open accounts are but investments that are not RRSP LIRA, RRIF or RRIF. Essentially they are investments that attract tax on their growth annually. "Pay as you go", sort of speak. Tax planning become more important in these investments as the type of income they generate determines the tax rate they attract. Capital Gains, realized or unrealized, dividend or interest income.
Open funds are those investment vehicles that are not registered and thus not qualify as an RRSP. The type of investment growth an asset generates determines the tax consequence. From a tax viewpoint;
Capital Gains income is the most attractive for two reasons. First, only 75% of the gain is taxable. At a marginal tax rate of 50% that's only 37.5%. Secondly, the tax is only due upon the actual or deemed disposition of the asset
Dividend income is the next most attractive form a tax view-point; specifically those that generate dividends from a Canadian corporation. While they are taxable annually it is at a favored rate.
Interest income is the least favorable investment income from a tax view-point. It attracts tax annually at the full rate.
We offer four types of investment vehicles with which to fund your investment strategy:
- GICs - We shop the market for the best rates in the country. 1 to 5 year CDIC guaranteed.
- GIAs (like GICs but may be creditor proofed). They may be registered as RRSP or Open Accounts. There is a wide array of term options, both on a locked or unlocked basis. Terms of up to 10 years are available.
- Life Insurance. Specifically a Universal Life Plan A financial product with incredible flexibility and applicability to a wide array of financial planning strategies. This product combines the protective elements of life insurance, the tax deferred growth elements of an RRSP the with significant investment flexibilities. Universal life plans are now in their 6th or 7th generation of evolution since they began in the early 1980s and are quite sophisticated and have become an actively sought option. There is even a contract available in in U.S. dollars.
- Mutual Funds. Diversifying & investing in the markets through professionals. The mechanism that affords average Canadians to invest widely in Stocks, Bonds and T-Bills on a global basis in modest amounts, with controllable risk. Mutual funds may be used inside or outside your RRSP. There are stock (equity) funds, bond funds, money market funds. Then there are balanced funds and asset allocation funds. Some funds are specialty funds that specialize geographically; by commodity, or by industry sector.
- Segregated Funds. Similar to Mutual Funds but different. Segregated Funds are governed by the Insurance Act and not the Securities Act As such segregated funds are offered by life insurance companies exclusively. This differentiation in governance creates advantages. Creditor Proofing capability is one. Minimum guarantees of the capital at death or maturity is another. Some segregated funds allow you to reset the maturity date, typically 10 years from deposit. This resetting allows you to "lock in" the periodic growth of the fund as part of the minimum guarantee. This is particularly attractive to seniors looking to preserve the capital. Many segregated funds are valued weekly not daily, as are most mutual funds. There are hundreds of segregated funds to choose from to fund your retirement savings strategies.
Canadians are looking to open investments to augment RRSP savings as well as for other investment opportunities.
It is a well known fact that putting your money into a savings vehicle at the beginning of the year is more fruitful than at the end. Likewise it is better to accumulate your savings monthly in advance than annually in arrears. There is one additional advantage to monthly in advance than annually in arrears. There is one additional advantage to systematically monthly over annually. It is called Dollar Cost Averaging.
Market values are constantly changing, one they are up another day they are down. The chart illustrates the point for a $12,000 investment one made on January 1 and the other spread over four quarters of $3,000 each. the investment is made into a mutual fund or segregated fund.
|A) Jan 1||$10.00||1,200||$12,000|
|B) Jan 1||$10.00||300||$3,000|
|B) April 1||$8.00||375||$3,000|
|B) July 1||$9.00||333.33||$3,000|
|B) Oct. 1||$12.00||250||$3,000|
|A) Dec 31||$11.50||1200||$13,800(15%)|
|B) Dec 31||$11.50||1258.33||$14,471 (20.6%)|
As you can see by spreading the investment over several months the growth is enhanced. ~
The term applied to programs usually associated with Mutual, Segregated Funds, or RRIFs that the investor initiates, to create regular flow of income , monthly, quarterly, semi-annually or yearly.
We can help our clients structure a SWP to suit their income needs.
Annuities - have an advantage in that the income you contract to buy from a life insurance company is guaranteed for your lifetime. In return you give up investment & income flow flexibility during changing economic conditions. Traditional annuity is like a mortgage in reverse. You give an insurance $100,000 in cash they return this to you in the form of income payments that are a blend of interest and principal. In the early years the bulk of any payment is interest and thus that larger portion attracts tax. With the consent of Canada Customs & Revenue Agency (CCRA), a prescribed annuity is structured so that the level of the tax liability is fixed from the first to last at the same level. A terrific tax planning tool.
We can not only arrange for a prescribed annuity but we can shop the market for the best rate.
Matching your savings asset growth to your objectives, and risk tolerance through design and diversification is the fundamentals of portfolio design. Maintaining that balance in shifting market conditions and shifts in client's circumstances is the essence of Portfolio management. We can arrange a private interview to assess your circumstance.
Investment LOANS & LEVERAGED Investing
With the recent change in the tax law on RRSP unused room carry forward you can take advantage of previous years' unused RRSP contribution limits in any year in addition to your current year's contribution. Financial institutions are willing to loan your the cash at or near prime to entice your contribution to them.You can also borrow to invest in a non registered investment to accelerate you return potential. Leveraged investing is not for everyone, but can be a very useful strategy for some.
We can assist you in the loan process. ~