RSP deadline approaching
By Ron Tarter
It's that time of year again when the amount of information available regarding Retirement Saving Plans can be overwhelming and confusing but here are a few hints to help clear things up.
A RSP allows the holder to deduct the amount contributed from their taxable income. If someone made $30,000 last year and contributed $3,000 to a RSP, income tax is only paid on the remaining $27,000. Also, the profit earned on the investment is not taxed annually, whereas the profit realized on an unregistered or non-RSP investment is taxed every year.
A RSP is not an investment itself, but simply a name for the tax shelter that allows fantastic write-offs and the ability for investments to grow tax-free. This growth can be larger than comparable non-RSP investments because tax is not being paid every year, gains or revenue are being re-invested.
There are some important rules. One can only contribute the equivalent of 18 per cent of their annual income, a maximum of $14,500 per year. However, if the maximum is not contributed in previous years the remaining money is carried over and accumulated indefinitely.
Furthermore, 80 per cent of the RSP must be invested in eligible Canadian investments while the rest may be invested in foreign securities. Some securities that may qualify include mutual funds, Guaranteed Investment Certificates, bonds, stocks and T-bills.
The carry-over provision must be considered carefully by students torn between contributing to a RSP, or simply investing in a normal account. Most students have a low income including loans and other income of up to $10-15,000 per year. Students can also write off the cost of tuition, which will lower income they get taxed on. In the long run, it may benefit a student to postpone starting a RSP and just let potential contributions carry over.
Students will be earning a substantially higher income in a couple years and it may be wiser for tax purposes to contribute to a RSP at a higher tax bracket. Contributions do not necessarily have to be cash but can also be an investment already held. Therefore, an unregistered GIC bought today can be used as a contribution in the future.
If a RSP makes sense, be mindful of what type of investments are held in the plan. The profits of different investments are taxed differently. Interest income from a fixed income security such as a GIC or bond is fully taxable annually, while capital gains from equities are only taxed at the time of sale and only 75 per cent is taxable.
A balanced portfolio consists of both equity and fixed income investments and a good idea is to place the fixed income securities in the RSP, sheltered from tax. Leave the capital gain-producing investments, such as stocks and equity mutual funds, outside of the RSP. The after-tax return is the bottom line. If you are considering starting a RSP, consult a financial planner before the Feb. 28 deadline.