RRSP season is upon us. Should you buy a RRSP this year? If so what should you buy? If you are planning on contributing to your RRSP is it a single purchase or is it based on a continuation of last years idea?
Is it a decision for your overall portfolio?
When investing, ensure that the tax benefit going into a RRSP, is greater than when the RRSP is withdrawn as a RRIF or other device.
How? Take your gross income, lower it by your RRSP contribution and check the tax table to see the benefit. If it lowers your marginal taxable income bracket, it is probably the right thing to do.
If it does not, because you are at such a low income tax bracket already, you may want to consider 'warehousing' your contribution and hold it until later when it may be of more value.
What should you be looking to invest in this year? I love it when I see columnists provide advice to Canadians to tell them what they should be adding to their portfolio.
How could they know? Foolishness dictates that you make individual decisions, irrespective of what you currently have in your holdings.
An RRSP contribution should only be a continuation of your portfolio. It should be adjusted to the portfolio needs, not to what is hot now.
Hot can get you burned.
However, if you want to buy only what is popular because you've read about it, done research, talked to you friends and watched the first year or more performance returns, then you would undoubtedly buy an income trust-style product.
Income trusts, as I have mentioned in the last two years, have ran away with the Canadian marketplace. They have boasted returns up to 50 per cent in the past year, and they are RRSP eligible.
Yet this is one of those times when past experience could lead to a disaster. Anyone recall Nortel?
Income trusts were targeted by the government in the summer as (they finally caught on), being a massive tax loss to the government. Therefore, they were not going to give any more advance tax rulings on income trusts until they made some decisions.
This immediately shocked income trust prices, which fell by 10-15 per cent.
They then recovered about half of the drop and today are off by about six to 10 per cent.
A recent ruling by the government was to equalize the taxes between dividends (by offering a dividend tax credit) and income trusts (by not changing them). Great, but while the late comers are arriving at the party, we've already started to take a lot of our income trust money off the table and realize some profits.
Should you buy an income trust for your portfolio and hold it in your RRSP as this year's contribution?
Only if an income trust is required long term as part of your pension - then it makes sense. See 'Handling' on page 13
From page 12
If not, do not put it into your RRSP, invest in what your portfolio requires. Or do not buy a RRSP, instead develop a long-term structural plan to maximize your growth, without developing a whole lot of encumbered capital.
Remember this about the RRSP, unless you know how to get the money out of an RRSP legally without being taxed at the maximum tax level, then all you are doing is building up a huge deferred tax account and handing it over to the government.
RRSPs are a wonderful collection device, but the distribution of the gains into your hands is an art form.
Do you have the second part of the process designed and implemented? RRSPs are a great deferral, the transition of the RRSP into spendable realizable gains is even better.
If you have a question or a comment for David, please e-mail him at askdavid@financialplanning.on.ca, visit www.financialplanning.on.ca or call Money Concepts Barrie at 1-800-870-8522.Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.
Please read the prospectus before investing.
Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
David H. Karas, CFP, R.F.C., RFP
President Money Concepts Barrie
AEGON Dealer Services Inc.
