Archive for March, 2007

Reader Question: Should I Withdraw from my RRSP?

March 14, 2007


Reader Mike has a question on withdrawing a recent contribution from his RRSP:

On the morning of March 1st, I contributed an extra $3500 to my TD eFunds RRSP account. However, for some reason it didn’t go through until March 2nd. So, I will not get the tax savings for tax year 2006. How annoying!

Considering that I parked the whole $3500 in a Money Market fund (due to my thought that there’s too much market risk right now), does it make sense for me to redeem the $3500 and put it on my mortgage (5.1% rate)? My thinking is that when I do my 2007 taxes, the extra tax for $3500 RRSP redemption will be exactly offset by the $3500 contribution, right?

Or do I have to pay the tax on the $3500 immediately, at time of redemption?

I am not sure about your exact situation but there are two problems with your strategy:

  1. Withholding taxes: As each withdrawal of up to $5,000 will attract a withholding tax (16% provincial tax and 5% federal tax in Quebec and 10% tax in the rest of Canada), you’ll be left with $3,150. You are correct that the $3,500 contribution for 2007 and the $3,500 withdrawal, which is treated as income, will offset exactly.
  2. Lost contribution room: The bigger problem is that $3,500 of your contribution room is lost forever.

While it is annoying that you have to wait almost an year for your refund, your strategy sounds like a lot of hassle to save, at best, a hundred dollars or so. Also, I am not a tax expert but you might be able to get a tax refund in the current year by submitting a request to reduce tax deduction at source with the CRA. Hopefully, our knowledgeable readers will have more comments on your question.

Competition, Not Regulation

March 13, 2007


It is politically smart to pick on the big banks: after all, they are reporting quarterly profits of billions of dollars and you can score easy brownie points by claiming that they are gouging customers who are withdrawing their own money. But, really how bad is this problem? According to the NDP, the banks are earning $420 million from ABM fees. If we assume these figures are correct, ABM fees are costing Canadians an average of $21 a year, hardly worth all the bellyaching.

ABM fees would be an issue if we did not have any other option. But we do have plenty of options even if we are seniors, students or disabled:

  • We could open a checking account at the nearest bank. When I was a student, the only bank on campus was Bank of Nova Scotia, so naturally that’s where I kept my account.
  • We could avoid white-label and other banks’ ABM machines altogether.
  • If we are out of cash, almost every business accepts a debit or credit card.
  • We could request a cash back when shopping at our favourite retailer.

The government’s responsibility is to ensure that there is competition and choice available in the marketplace, not to regulate everything. Banking is certainly one area in which customers have plenty of choice and can arrange their affairs so that they don’t pay any fees to withdraw money. If they don’t it is their fault, not the banks.

Here’s a thought: how about being a smart consumer by opening a no-fee chequing account with PC Financial and buying the shares of your favourite big bank? You’ll avoid the high banking fees and thank everyone else who want to keep funding a portion of your dividend cheques.

Smoke and Mirrors Myths, Part 2

March 12, 2007


Continuing the series of posts (Part 1) examining the financial myths mentioned in David Trahair’s book Smoke and Mirrors, let’s take a look at the second myth:

RRSPs are the Holy Grail of Retirement

Mr. Trahair rightly points out that it is better to pay down credit card debt or income tax debt than invest in a RRSP and suggests that Canadians paydown all their debts including mortgage debt before investing in an RRSP. He concedes that RRSPs used wisely can be a significant part of a secure retirement but only if attention is also paid to spending patterns and debt levels.

I have a neutral opinion on the RRSP versus mortgage paydown debate. I believe that RRSPs are a slightly better option but think that either is fine. You can only tell which would be the better option with the benefit of hindsight. Mortgage paydown would have been the better option in 2000 but someone investing in equities inside their RRSPs in 2003 would be very happy with the results today. It would be ideal if you can contribute to the RRSP and paydown the mortgage but the key is to have the discipline to at least do one.

I have a feeling that Mr. Trahair is outraged that mutual funds are getting rich even when investors are doing poorly. But that is no reason to avoid RRSPs altogether. That would be a bit like cutting off the nose to spite the face. Investing in RRSPs doesn’t have to mean forking over a big chunk of your capital to mutual funds evrey year. You could construct a simple, diversified, low-cost portfolio in minutes using ETFs or index funds.

Related: The Case for RRSPs Over Everything Else

Continued in Part 3…