FAQ – Frequently Asked Questions
Q. Should I pay down my mortgage or should I invest in RRSPs?
It depends on your age, the interest rate on your mortgage compared with the return on your RRSP and other variables. The longer the mortgage has to run, the more effective paying down will be since this will reduce the total interest paid. However, the higher your tax bracket, the more effective an RRSP becomes since the government subsidizes your contribution to a greater degree.
The older you are, chances are you have a better paying job, putting you in a higher tax bracket and your mortgage has fewer years to run, the impact on interest saved isn’t as great and an RRSP is more logical.
If you want the best of both worlds, make an RRSP contribution and use the refund to pay down your mortgage.
If, however, you have outstanding debt like credit cards (9% to 29%) you are best to eliminate these first before a mortgage pay down or RRSP contribution.
Contact me for a detailed analysis.
Q. What is the best RRSP contribution strategy?
Historically, Canadians think that February is the time to buy RRSPs. A better terminology would be that February is the time to maximize their RRSP contribution before the deadline.
A more cost-effective method, which tends to be easier on the budget, is to contribute monthly or bi-weekly. This strategy employs a dollar-cost averaging technique, especially valuable for mutual funds, that effectively lowers your “average cost” of purchasing funds over the long term. Essentially, you would contribute 1/12 of your normal annual RRSP contribution but on a monthly basis.
If you need to add extra because you made more money than you anticipated, you can add this in February, hopefully with cash on hand and not incurring an RRSP loan, further saving you money. At the same time, your money has compounded over the whole year.
Contact me to customize your strategy. It is your future, plan it well!
Q. What do the letters “CFP” mean?
The letters “CFP” stand for Certified Financial Planner. The CFP mark identifies individuals who are dedicated to a high level of professionalism in providing financial advice.
In the absence of uniform government regulation of financial planners, the CFP credential assures the public that those financial planners who are CFP licensees have agreed to adhere to high standards of competence (education, experience and examination) and ethical practice as set out by the Financial Planners Standards Council (FPSC).
Financial planning involves determining how individuals can meet their life goals through proper management of their financial resources.
Q. What is a RRIF and its characteristics?
A RRIF (Registered Retirement Income Fund) is one of several income options for your RRSPs. A RRIF can be started at anytime but if you are turning 71 this year, and have RRSPs, you must select a retirement income option before December 31. RRIFs can be very flexible so that you can maintain control over your investments inside the plan. While RRIF recipients must receive a minimum amount, there is no maximum. RRIF income can be structured to provide a lifetime income. All RRIF income is taxable.
You can choose to use the age of a younger spouse on which to calculate the minimum payment to reduce the income amount – thus reducing taxes and keeping more money inside the plan to grow tax-sheltered.
If you are turning 71 this year or you wish to discuss your options, please contact me.
Q. What are tax-effective ways to invest for my child’s (or grandchild’s) education?
An RESP (Registered Education Savings Plan) allows the growth in the investment to be tax-deferred to the beneficiary (child/grandchild). He or she will pay income tax, usually at a lower rate than the contributor, on the growth. The child/grandchild must have a Social Insurance Number. The Canadian Educational Savings Grant is 20% of the yearly contribution to a maximum of $400 per year. Another method is an equity mutual fund held ‘in trust’ for the child/grandchild.
The growth (mostly capital gains) is taxed in the child/grandchild’s name, again at a lower rate. Each investment has its unique characteristics that are beyond the space requirement of this forum and also are dependent on each individual situation.
Contact me for more details.