Seventh Inning RRSP Stretch

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I’ve been on the 5 year Income Tax Plan (in a general sense)

(1) Firstly -“Oh Crap – How did I get into this mess” phase
(2) Secondly – “Face The Music – Payment Plan and catch up on the arrears” phase
(3) Filing on time! With Respectable payment plan or, not even being asked for one!
(4) Filing on time – with payment on filing? Am I finally current?
(5) Have instalments and RRSP contributions before I even file my tax return!

(Actually, I’m somewhere ‘averaging’ out between options (3) (4) and (5) simultaneously)

This post is about RRSP contributions

Yes – my wife and I have been investing monthly into our “Registered Retirement Savings Plans” (RRSP) since about February 2003. I am unable to make big chunks into my plan but, the slow and steady sure keeps me in the race.

It started with a recommendation from my wife’s uncle, who recommended my wife’s mother, and then who recommended it to us. Enter – “The Financial Planner”. This was a tough call for us – Okay, for me. I would like to think that I am savvy enough investor and accountant that I don’t need a financial planner. But, the basic fact was that as savvy as I am – I’m terrible at it! (that is – at managing my own finances, because I am such a risk-taker)

The first thing this financial planner asked us to do was to figure out where our money was really going. This was easy! I have the most sophisticated financial statements for personal use you will ever find. He immediately picked up a few things from my trial balance…

* We were paying mortgage insurance
* We had no life insurance payments

We took some blood tests with Manulife and since it’s been a couple of years of no smoking, we were eligible for a relatively low rate for term life insurance (given our ages). This term life insurance has a premium fixed for 20 years, without any further tests with a term payout MORE than enough to pay off any mortgage or credit card or other debts we might have. One of the problems with mortgage insurance (and even insurance on credit cards if you fall for that), is that it is based on a declining balance. If you die accidentally, your mortgage insurance will pay off the balance of your mortgage. That’s great! But, what if you don’t die for another 15 years, and you hardly owe any money on your mortgage? Chances are that only the small portion of your existing mortgage at that time will be paid off. There will be no other benefit from dying to your estate.

In doing this, which was a great thing in itself – having life insurance finally – actually saved us $75.00 per month (because we cancelled all other insurance premiums and stopped the mortgage insurance add-on).

After that, we were looking at our existing plans and in an attempt to try to equalize them both when we reach retirement, $50 per month of this savings went direct into a spousal RRSP plan. This is a plan when one spouse contributes and receives the deduction, and generally the other spouse will withdraw the amounts and take the income and pay tax on it in future years. We were ahead by $25 per month, had life insurance, our debts will be paid off in case one of us dies, and our premiums will remain stable for the next 20 years!

And speaking of RRSP’s ….

So – You can contribute anytime in a calendar year and up to 60 days after the end of the calendar year into your RRSP Plan (March 1, 2006 is the deadline). Will you be contributing this year?

* You are allowed to contribute up to 18% of last year’s earned income into your plan
* If you don’t contribute into your plan, the amount will remain and you can carry it over the years, and it’s called your contribution limit
* You can’t contribute more than your contibution limit in one year
* There are limits to the 18% rule – up to the maximum limit each year will be added
* The maximum limit for 2005 is $16,500
* The maximum limit for 2006 is $18,000
* The maximum limit for 2007 is $19,000
* The maximum limit for 2008 is $20,000
* The maximum limit for 2009 is $21,000
* The maximum limit for 2010 is $22,000
* If you have no “earned income” (non-investment income, pension plan income, taxable capital gains, retirement allowances, etc) , you should invest in your non-registered plan instead
* If your Net Income is just above a tax bracket level change, it usually pays to contribute at least the amount to reduce your Net Income back to the lowered tax bracket level (e.g. if tax bracket changes at $32,000 and your income is $35,000 – invest at least $3,000)
* Don’t take my word for anything .. discuss this with your accountant or tax preparer or financial consultant! IT’S YOUR RETIREMENT!

So – It’s almost the end of November now – and technically, in Canada, you have 3 months left to make a RRSP contribution to count against your 2005 income you earned. It’s the end of the year and a good time for tax planning! It’s easier to sock away 6 bi-monthly RRSP contributions than 1 lump-sum payment March 1, 2006.

Anyway .. thought you would want a reminder notice ..

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