This column is meant to follow up the column that I wrote for the last edition.
Sometimes it makes sense to withdraw monies from your RRSP. In the last few years, the Tax Free Savings Plan has been created that provides an option that may give greater flexibility than RRSPs. I will discuss this later in the column. In the meantime, you can borrow from your RRSP for two reasons without having to pay tax if you make regular repayments.
These are for the Lifelong Learning Plan (LLP) or the Home Buyer’s Plan (HBP). For the LLP the withdrawals may not exceed $10,000 in a year and $20,000 over four years and the reason can be for either the taxpayer or their spouse and must be repaid in equal installments over 10 years. The withdrawal for the HBP can be as much as $25,000 and must be repaid within 15 years. Any missed repayment will be added to the income of the taxpayer in the year missed. As the intention of RRSPs is to provide for future income and security in retirement, it is wise to repay these loans as soon as possible because until the funds are replaced you are missing out on the accrued deferred interest that assists in building an adequate retirement nest egg.
I mentioned Tax Free Savings Accounts (TFSAs) earlier in my column in the previous edition. TFAs were introduced in 2009 and, like the RRSPS are cumulative and income earned in the account, is tax free. Differences include:
• the original principal investment is not tax deductible
• amounts may be withdrawn and replaced, but be careful as there are restrictions in timing when replacing withdrawals.
The rate of contribution to TFSAs was $5,000 for 2009 through 2012, increased to $5,500 for 2013. The greater flexibility in withdrawals may be more attractive if you can anticipate needing the monies in the future before retirement i.e. for education or purchasing a home but you will not get the a tax rebate when making the purchase as you do with an RRSP. As well, if your tax rate is lower and you anticipate a higher rate on retirement, the TFSA may look more attractive. Similar penalties are assessed for over-contributions to TFSAs as for RRSPs (1% per month for the period of over contribution). A tax planning approach might be for a couple (married or common law) with different levels of income to have the higher earner contribute to the lower earner who will then purchase a TFSA.
The issues we have discussed here can become quite complex and decisions can affect not only your current taxes but your future security. This discussion is meant to introduce you to some of the considerations but I can only recommend that you consult professionals in tax planning and in investment decisions. It is also important that you become as familiar as possible and as knowledgeable as possible because it is your future that you are planning. I can remember several years where many clients invested in speculative venture funds because they “had to absolutely save taxes that year” and the fund ended up making very little, if any, money over a decade. And, finally, a constant thing to remember, if it sounds too good to be true, it probably is.
Terry Robert B.A., C.M.A., C.G.A.
R. T. Robert Certified General Accountant
Professional Corporation
accountants.mb.ca
Please note that this column deals with details and circumstances in a general way and comments are meant solely as a guide. For your protection, a professional accountant is recommended and should be consulted before making any decisions regarding anything discussed in this column.
Tax Time Already (RRSPs Part 2)
