Are Investments in RRSP’s Right for you?

Sometimes, NO!

It is once again that time of year; everyone rushes out to ‘buy’ RRSP’s.

Firstly, you do not ‘buy’ RRSP’s, you make an investment in them. However, a greater question is “should you be investing in RRSP’s in the first place?”

You would be surprised at how many people believe that RRSP’s are right for them, when in fact, they can be horribly wrong and end up costing you thousands of dollars in additional income taxes and interest.

Interest rates today are still very low, and your return on a typical RRSP type investment is likely about 2%; so, if you have highinterest debt such as credit cards or car loans, you are far better off to pay that debt than investing in RRSP’s.

Once the high-interest debt is paid down, then take the money that you would have paid each month and invest that in your RRSP’s. You will be far better off down the road.

If you are a small business owner, then RRSP’s are almost always a bad investment; here’s why:

While you are running your business, that business likely pays a fair amount of your ‘personal’ expenses such as your cell phone, vehicle expenses, perhaps you have a deduction for a home office etc. These expenses significantly reduce your need for monthly income and therefore keep your taxable income at a low rate.

For example, let’s assume your business is paying for those previously mentioned items and they add up to $2,500 per month. That equates to $30,000 per year. Additionally, you need to pay your mortgage, groceries and other items so you take a ‘pay cheque’ for $40,000 per year.

Your taxable income at tax time is taxed at the current effective tax rate of 15% (ignoring personal credits, other deductions etc.).

When you retire, you would have to start paying for those ‘personal’ items from your retirement after-tax income.

Using the figures above, you would require roughly $70,000 in after-tax income, meaning you would need about $100,000 in annual retirement income to have the same standard of living;

Your effective tax rate for this income is much higher, and some of it would be taxed (currently) at as high as 26%! The government is the real winner in this scenario.

Also, figuring your income at retirement can be a real juggling act; you have to consider CPP, OAS, company pensions and your income from RRSP’s and other investments. You could accidentally put yourself into a very high tax bracket if you do
not plan properly.

Another consideration for your RRSP’s - The First Time Home Buyer’s Plan Buying your first home can be very difficult, however, cashing in RRSP’s for the down-payment can be a very poor idea; you may get the home, but you will lose the tremendous benefits of compound interest on the funds withdrawn. This could end up reducing your retirement funds by thousands of dollars.

Other key points to remember and consider before or if you will invest:

• Invest each pay period, do not wait until February;

• You do not have to take the deduction on your taxes in the year you make the investment

• Consider the huge benefits of Spousal RRSP’s

• Use the services of a Professional Financial Advisor

• Talk to your accountant - make sure RRSP’s are a good investment for you

Remember, everybody’s financial situation is very different, talk to an investment professional and your accountant before you make any decisions.

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