RRSP's

Soon the marketing engines will start to wind into high gear as the annual RRSP sales season takes off.  The industry will market the financial benefits of saving money by highlighting the tax treatment Ottawa gives to the situation.

The goal of saving for retirement is an important goal, but it tends to get overshadowed by the tax refund emphasized in the short term.  A longer term look at the options available to people is necessary before you can be assured of making the right decision.

One needs to be aware of the fact that RRSP's are a tax deferral option and it is necessary to consider your tax situation both at the time of contribution and the time of withdrawal.  With the time of withdrawal so far into the future, many people fail to consider it, or to plan for the tax payment in advance.

Investigate more than one option and choose the one that best suits your circumstances

People should consider an RRSP option as one aspect of their financial plan, not just dump money into a mutual fund or GIC in order to grab the tax refund, then assume they have fulfilled their need to plan for retirement.

Ellen Roseman lets us know about the Saskatchewan Pension Plan and how it is an alternative available to anyone in Canada.  An option to consider, given the reality of the performance of many of the mutual funds promoted in the coming marketing blitz.  http://www.ellenroseman.com/?p=1259

One of the situations where an RRSP makes sense can be found here.  http://tinyurl.com/ak6p26e  I would like to point out though, the scenario only works if the individual is able to curtail future credit card spending and does not run up another balance on the card.  It is also noteworthy to point out that a $5000 loan will do the same thing and at 4% can be paid off in one year with $425 per month payments.  This would leave $6000 to invest the next year with no taxes pending in the future, if a TFSA was used.  

The best plan depends on your ability to manage your spending habits.

Spousal contributions were a great way to split income in retirement for situations where one spouse had a pension plan and the other did not.  The recent change in pension plan splitting has changed the game a little, but as outlined in this link, it still has value.


http://www.advisor.ca/tax/tax-news/the-case-for-sposual-rrsps-51703

Here are some situations where a RRSP does not make sense, more on TFSA's later.   http://tinyurl.com/am34nsp

If you are able to generate a lump sum, I offer the following suggestions for utilizing it.

1. Pay off credit card balance with commitment to spend less than you make
2. Pre-pay mortgage principle with commitment to invest half of payment amount when mortgage is paid off. (There will be other things needed by the time the mortgage is gone)
3. Maximize TFSA contribution with highest rate of return your risk profile permits
4. Maximize RRSP contributions with plan to withdraw funds in a way to pay less tax

Depending on which circumstances are applicable to you in the above examples, a RRSP investment requires more thought than just responding to the financial services marketing pitch.