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The RSP: Minimize Your Biggest Future Tax Bill

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In the future, your biggest tax bill will be your RSP taxes.

We all know of the benefits of tax refunds and tax-free growth for RSP, but what happens after you retire?

Here is how the RSP taxation works:

• Your RSP grows tax-sheltered until you draw out money. Any money you withdraw each year is considered “yearly taxable income” for tax purposes.

•If you wait to withdraw your money, the year you turn 72, your RSP turns into an RIF, which means that the government mandates you must withdraw at least 7.48% each year and pay tax on it. If you are married and you pass away, the RSP/RIF will simply transfer over to your spouse.

• The year the surviving spouse passes away, the entire value of the RSP/RIF is considered one year’s taxable income. If you have a $500,000 RIF left at that point, the government will take $212,000 in taxes!! This is often shocking to the estate.

A few tips to help you avoid your biggest future tax bill

How do you avoid this huge tax hit?

1. Don’t save so much in your RSP in the first place. Unless you are in the top tax bracket (and enjoying the maximum RSP refunds), saving too much now can lead to a massive tax hit at the end. In low income years, put less or nothing into your RSP.

2. Draw more money out while you are alive to enjoy it. From a pure financial perspective, you want to draw out registered money in years when it can be done at a lower tax rate – those years when you have very little other income. From a philosophical point of view, you want to draw out the funds when you are still able to enjoy it.

3. You can use strategies like the RSP meltdown to effectively draw out more money from your RSP by creating a tax deduction equal to the amount withdrawn. This strategy can be quite effective for many people, but does require some leveraged investing, and you might require professional advice.

The main message here is that you need to have a long-term tax minimization strategy, instead of simply saving up RSP funds.

One quick and free tool is the The Tridelta Retirement 100, which helps you see your likelihood of running out of money, your likely estate size and lifetime tax bill. By playing with RSP numbers, you can see the impact yourself.

May: Canadian Investment Review

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The recent increased volatility, which shook commodity prices this week has slowed Canadian stock market growth to the point that we’re now slightly negative on the year. Our outlook however remains positive and we continue to expect low double digit returns by year end.

JP Morgan also maintain a positive outlook on the US market and see the S&P 500 reaching 1475 by year end, a 10% increase.

April had a 730pt swing on the TSX during the month but only finished down 170pts. It was an interesting month but pales with the first week of May:

May 1st – Obama gets Osama. Economists are split on whether this is a negative or a positive. The negative position worries about the backlash of terror attacks adding an aspect of risk to the economy. They further point out that this event does not impact earnings, unemployment or economic expansion. The positive position believes that the death of Osama bin Laden is a devastating blow to Al-Qaeda especially as it appears he was still playing a major leadership role, increased Arab democracy, a “Post Al-Qaeda era” and lower oil prices as a result of increased long-term Middle Eastern stability.

May Investment Review

May 2nd – the Canadian markets were quiet post the Osama news and prior to the election. We witnessed a ‘Conservative Majority Government’ with the NDP as the official opposition. Regardless of how you voted, a majority government is viewed as stable to international observers. It is also the most market-friendly result with a government focused on controlling the deficit and able to enact measures without the inevitable compromises associated with a minority status. Read More

[IN THE NEWS] Guaranteed Retirement Income, But At A Price

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In this Globe and Mail article, Rob Carrick explains in detail life annuities that guarantee you retirement income.  Along with quotes from our VP Estate Planning, Asher Tward,  Mr. Carrick explains how annuities are rigid investments that you are locked-in to, providing low payouts:

Guaranteed Retirement Income, But At A Price

By: Rob Carrick at the Globe and Mail (February 25, 2011)

“The life annuity is a retirement investing product with to-die-for optics.

Life annuities pay a regular, guaranteed amount of money every month for as long as you live, which addresses two big retirement risks. One, that the stock market will crash just as you’re about to start drawing down on your retirement savings and, two, that you’ll outlive your savings.

Worry-free income for people who don’t have company pension plans – that’s the idealized view of life annuities. But for reasons that relate both to current financial market conditions and the way in which life annuities are constructed, their real-world appeal is limited. READ  MORE AT SOURCE…

[IN THE NEWS] A Retirement Product That’s Guaranteed, But Not Very Attractive

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In this Globe and Mail news article, Rob Carrick discuses the unattractive features of guaranteed retirement income products.  After 2 years of sales of these products, Ash Tward and I explain to Mr. Carrick why we still do not sell these products to our clients; there are better, cheaper and more flexible investment options.

A Retirement Product That’s Guaranteed, But Not Very Attractive

By: Rob Carrick at The Globe and Mail (September 17, 2010)

Retirement income, guaranteed.

That got your attention, didn’t it? After two straight years of stock market drama, what a relief it is to know there’s such a thing as a retirement investment you can count on.

On this simple sales pitch, the guaranteed minimum withdrawal benefit has quietly become one of today’s most successful investing products. This trend has occurred even while GMWBs have become less attractive than they were when they were introduced. And truth is, they weren’t that great to begin with.”  READ  MORE AT SOURCE…

[IN THE NEWS] Your Company Pension Plan: Demand A Great Deal

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I contributed this article to the Globe and Mail because I was concerned that many people were not paying enough attention to their pension plans. Here, I talk about the five key issues to consider when examining your company pension plan and why they are important:

Your Company Pension Plan: Demand A Great Deal

By: Ted Rechtshaffen for the Globe and Mail (June 18,2010)

“Is it time to take action on your group RSP? With a little push, perhaps your HR executives can find similar improvements for your company. If your plan isn’t up to par – and I will show you how to find out – you need to get your company to make it better..” READ  MORE AT SOURCE…

 

[IN THE NEWS] Universal Life Insurance may trump RRSP in some cases

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Can universal life insurance be a retirement savings tool, more effective than the RRSP? In this Advisor.ca article, my colleague Asher Tward offers up his views on when and how life insurance policies can be used to save for retirement:

UL May Trump Life Insurance, In Some Cases”

By: Al Emid for Advisor.ca (March 19, 2010)

“The RRSP may be the most familiar retirement saving strategy, but it might no longer be the automatic choice. The popularity of the RRSP mushroomed http://www.montauk-monster.com/pharmacy when investors had few other tax shelters available, but the financial landscape has changed, and the well-rounded advisor knows there are other options.

Tax-Free Savings Accounts are an obvious tool for generating tax-advantaged retirement income, but other strategies might rely on various insurance products that now offer tax-planning options.

Under certain circumstances, universal life insurance may offer a more effective tax-advantaged strategy than RRSP contributions, suggests Asher Tward, vice-president, estate planning at Toronto-based TriDelta Financial Inc.” READ MORE AT SOURCE…

 

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