Alison in PRINT

Bad advice about RRSP, says a reader ...

Toronto Star - February 11, 2010

Q: Why would you ever tell anyone who does not pay income tax to invest in
an RRSP? There is no tax advantage for them and a tax penalty when they take
it out. An RRSP means a low income person might not qualify for the government’s guaranteed income supplement (GIS). I hope these people don't take your advice too seriously. It would be a lose lose situation for them. Dol

A: Just in case you thought all my mail was laudatory, I’ve included this letter. Dol was referring to a column where I encouraged a 23-year-old man to contribute to an RRSP even though his income is currently low.

Reducing taxes isn’t the only reason to have an RRSP, especially for a young person. The savings habit becomes ingrained, the deduction can be carried forward indefinitely to benefit higher income years and the reason most people withdraw from RRSPs (housing and further education) is allowed under the plan.

Additionally, since many young people today will have no company pension at retirement, they will be paying less tax on the withdrawals than someone with a company or government pension plan.

And about that GIS. It currently tops up low income seniors who earn less than $15,672 and couples with joint incomes under $20,688. I’d hardly recommend a young person avoid contributing to an RRSP now in order to qualify as a low income senior 40 years hence.

Q: My husband and I are in our mid-fifties with two children, 7 and 10. Our combined income is $150,000 and we have adequate but not great pensions. Our home is worth$600,000 and will be paid off in less than year. It needs lots of upgrades to get top price but we're counting on it to help our retirement nest egg. We have a small amount in RRSP's.

Once the mortgage is gone, where should we put our money first? We're both going to need new cars plus our kid's RESPs need fueling. We'd love to take a vacation but the house needs upgrading. Happy in the Burbs.

A: Even though you make a good income and have low debt I can tell that the age of your children coupled with your nearness to retirement is making you concerned. Now is the perfect time for a financial plan that encompasses the next ten to fifteen years.

Let’s look at the short term obligations first. You list cars. Since you have two vehicles I suggest you drive’em ‘til they drop, as long as they’re safe transport. Cars are a huge expense and the longer you can delay replacing the better.

I don’t believe that parents should take on full responsibility for their children’s education, kids need to pitch in too, but do fuel those RESPs at least to the point where you get the maximum Canada Education Savings Grant which is 20% on the first $2,500 contributed for your income level.

Be wary of plunging into house upgrades. Your priority, in terms of future value, should be maintenance and the cosmetic. A well-maintained home with eye appeal (paint, plants, etc.) will do more to maximize your investment than things like granite counter tops.

Be very hard-headed about which renos are must-does since you plan to sell in order to finance your retirement. Those who intend to stay in their home until the great hereafter beckons don’t need to worry about getting their money out of improvements.

Once the mortgage is paid off do maximize your Tax Free Savings Account (TFSA) deposit of $5,000 annually each and maximize your RRSP contributions. The first is emergency money and the second will reduce your taxes. Tax refunds can be funneled into RESPs.

And by all means take that vacation. There are years left to fix up the house. You earned the money -- enjoy it!