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Managing Your Money
Last minute RSP tune-up tips
If the fast-approaching 2003 Registered Retirement Savings Plan (RRSP) deadline has you singin' the blues, take note of these RRSP tune-up tips and you'll be humming a much happier melody when your tax refund cheque arrives and later, during the retirement of your dreams.
For 2003, your RRSP contribution limit is 18 per cent of your previous year's earned income to a maximum of $14,500 (up $1,000 from the 2002 taxation year), minus the previous year's pension adjustments - plus any unused contribution room carried forward from previous years.
Here's the simple math on why it pays to make maximum RRSP contributions each year:*
At age 25, you begin investing $250 a month in your RRSP ($3,000 a year). At age 60, assuming an annual return of eight per cent, your RRSP nest egg will amount to $538,825 in pre-tax dollars
Each year from age 25 to age 60, you top up your RRSP contribution by $1,500 (the maximum amount allowed by the government based on your income). At age 60, again assuming an annual return of eight per cent, you'll have added $258,475 to your retirement nest egg. And, for each of those 35 years, you'll have gained an additional tax deduction for each $1,500 of top-up money you invested.
Use these last minute tips to get the biggest bang for your RRSP bucks:
Fill up your carry-forward room: If you haven't made your maximum allowable RRSP contributions for previous years, do your best to play catch-up this year. There is no restriction on how long you have to make up for missed contributions - but the sooner you fill up that excess room, the better: First, you'll get an immediate tax deduction for your entire contribution; and second, you'll have more money working for you under the tax deferral of your RRSP.
Add the benefits of a loan: Borrowing can be a smart way to maximize your 2003 RRSP contribution, or to catch up on your past contributions. The key is to get the lowest possible loan rate, which can make the cost of borrowing less than your potential investment returns, if you keep the loan term short. Whenever possible, try to keep the payback schedule to one or two years. If you are borrowing a sizable amount to capitalize on carried-forward contribution room, a term of up to five years may be appropriate. Most financial institutions offer special RRSP loans with payback schedules that can be tailored to your needs. You can further reduce the payback period by using your RRSP tax refund to repay the loan.
Consider an 'in-kind' contribution: If you have qualifying non-registered investments (which include such common investment vehicles as mutual funds, stocks, bonds, guaranteed investment certificates and government-guaranteed savings bonds) you can choose to contribute them to your RRSP. This is known as an 'in-kind' contribution and allows you to claim the RRSP tax deduction based on the value of the assets on the day of transfer. Be aware, however, that by transferring capital assets (such as equities or mutual funds) that have appreciated in value, you will trigger taxes on realized capital gains. Alternatively, you will not be able to claim a capital loss for tax purposes on transferred capital assets with a market value less than the purchase price at the time of the transfer. You could also face taxes on accrued interest if you contribute a fixed-income security to your RRSP between payment dates for interest. And, if your capital asset appreciates in value inside your RRSP, the gains will be taxed as regular income and not more favourably as capital gains.
Here's another tip you can take to the bank: A financial advisor can help develop the RRSP strategy that works best for you.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
*The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.
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The Net Income Stabilization Account (NISA) program is winding down. What should you do?
If you're a farmer, it's a good bet you've been a participant in the joint Federal-Provincial/Territorial Net Income Stabilization Account (NISA) program. If so, you already know NISA was replaced in 2003 by the Canadian Agricultural Income Stabilization program (CAIS) and the NISA wind-down begins at the end of March. That means you have from March 31, 2004 until March 31, 2009 to completely wind down your existing NISA account - and how you choose to do that can have significant tax implications.
First a little background: NISA was a voluntary program designed to help farmers with their long-term income stability. Generally, anyone reporting farming income or loss for income tax purposes could participate in NISA - including individuals, corporations, co-operatives and communal organizations.
Participants could annually deposit up to three per cent of their eligible net sales into an individual NISA account and receive a matching contribution from the federal and participating provincial governments. Deposits were paid bonus interest of three per cent over and above the interest rate offered by a financial institution. Deposits, matching contributions and interest could then be withdrawn in lower income years. Every NISA account was divided into two funds: Fund 1 for participant deposits, which were non-deductible and non-taxable when withdrawn; and Fund 2 for government matching deposits and interest, which were taxable when withdrawn. In the past, when a participant requested a withdrawal from an account, the money was always taken first from Fund 2 (taxable) and, when depleted, from Fund 1 (non-taxable/non-deductible).
However, for the wind-down period, the withdrawal rules have been revised to make tax planning easier and allow more flexibility. Here are the options:
You may transfer all or part of your existing Fund 1 money into a new CAIS account.
You may choose to access your entire NISA account balance beginning March 31, 2004, or have it paid out in instalments.
If you decide on instalments, payments from Fund 2 will be equalled by payments from Fund 1, until both funds are paid out. This enables you to spread the tax liability of Fund 2 over a period of several years.
Interest on your Fund 1 account will continue to be paid by your bank or credit union while your account is winding down, but the bonus interest paid by governments stopped being paid on December 31, 2003.
Each year of the wind-down, you must withdraw at least 20 per cent of your March 31, 2004 Fund 2 balance, plus an equal amount from Fund 1, plus interest added during the year.
You can choose to withdraw more that 20 per cent per year. For example, you may decide to reduce Fund 2 by 40 per cent by March 31, 2005 and not withdraw in 2006.
The wind-down options you choose will depend on your personal financial situation, but as a general rule, you'll want to limit your tax liability by managing your income so your NISA payments don't occur in high-income years. Most farming operations are on a cash basis when measuring income for income tax purposes. This allows you to consider certain planning strategies designed to avoid being placed in a high tax bracket, such as:
Paying salaries to family members (as long as the salary is reasonable).
Post-dating grain sales to future years.
Pre-paying farm expenses.
Utilizing optional inventory adjustments.
Making additional Registered Retirement Savings Plan (RRSP) contributions (within prescribed limits).
Alternatively, if you find yourself consistently in a high-income bracket, you might want to consider incorporation of the farming operation and coordinate your salary/dividend program with your NISA drawdown.
As with every other aspect of your farming and financial life, a professional financial planner can help make sure your NISA decisions are both tax-efficient and in line with your longer-term goals.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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