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moneysense.ca, 22/02/10
Don’t rush your RRSP decisions
The RRSP season will reach a crescendo this week with Canadians rushing in to “buy RRSPs” to beat the March 1, 2010 deadline. Even if you decide to make a last-minute contribution, you do not have to rush your investment decision. If you are new to the RRSP game, you can open a RRSP account with a no-fee institution such as ING Direct, park your contribution in cash and take your time planning your investment strategy. With the strategy in place, you can transfer the RRSP account out of ING Direct at a later date to another institution that offers a wider range of investment products. If you work with an advisor or already have a RRSP account with your local bank, you can instruct them to park your RRSP contribution in cash temporarily.
All too often, RRSP accounts hold a hodgepodge of yesterday’s winners precisely because the annual contributions are invested in the latest ‘hot’ fund or sector or market. It would be better to devise an investment plan and asset allocation strategy first and then pick the products to implement the strategy. An even better strategy would be to then sign up for pre-authorized contributions and avoid the last-minute rush altogether.
In the spirit of the RRSP season, here are selected tips from past years:
- A RRSP Contribution may not always make sense.
- More tips including this one: don’t hold too many funds.
- If you are contributing in-kind, you may want to brush up on superficial loss rules.
moneysense.ca, 22/02/10
By parking funds with one institution and then moving them at a later date, aren’t you leaving yourself open to some ugly transfer fees?
I now make my contributions monthly, but in the past I just threw them into something at the last minute to beat the deadline. The result is that I have RSPs all over the place. Each account is small on its own, and I haven’t moved them because I don’t want to pay $125 in fees for each transfer. I know some brokerages will cover these fees, but usually only on amounts above $10000, and only for new customers.
Good post and good advice. When you say “cash” do you mean a noney-market fund or some other type of interest-bearing instrument?
Are there any good sources online that take you through the transfer process step by step? I am planning to transfer some of my current RRSP holdings to another institution, but have been putting it off because I don’t really know how to start the process, nor do I know how much paperwork and hassle are involved.
Oh duh, I missed the second link in your “Related Posts” which very clearly explains how to transfer an RRSP from one institution to another. Clearly, one cup of coffee is not enough for me on Monday mornings!
Chris: ING Direct does not have a transfer out fee.
I try to introduce people to indexing by using the ING fund. If they don’t like it, or their knowledge increases such that they can manage cheaper ETFs, then they can bail out at no cost.
Dan.
@Chris: ING Direct doesn’t charge a transfer fee. Many institutions won’t charge a fee for inter-departmental transfers. TD, for instance, won’t charge a fee for transferring a TD Mutual Fund Account to TD Waterhouse.
If you already have a self-directed account, the best bet would be to park the money in the same account.
@Dale: “Cash” means a high-interest account, money market funds, cashable GICs etc.
@Brad: I’ve transferred accounts a couple of times. It’s typically a very smooth process. If you have a large enough account, do negotiate a fee refund from the receiving institution before you initiate the transfer. Note down the name of the person you talked to and once the transfer is complete, call in and request the refund to be processed.
http://www.canadiancapitalist.com/reader-question-on-transferring-a-rrsp-account/
@DG: ING does have a very nice index product — yes, it’s a bit on the expensive side and hopefully investors will figure out that they can replicate the fund for half the cost themselves.
As the RRSP deadline is March 1, 2010, does this mean you can actually contribute on March 1 and it will be counted to the 2009 Tax season? Thank you.
I wonder if anyone can verify my interpretation of a potential RRSP strategy for this year and next year. It perhaps applies to only a few people, but if it does apply, it could be easy to miss. I’m not sure if RRSP contribution optimizers (as in QuickTax or other tax packages) consider this or not.
The goal is to contribute enough to qualify for the Ontario Sales Tax Transition Benefit. For details on the tax credit: http://goo.gl/wAgv
This would apply if:
a) you are an Ontario resident
b) your family income is over $160,000 (this strategy would apply for singles if your income is over $80,000 as well, but for the remainder of this post I’ll use the values for families as the example).
c) you have enough RRSP headroom available to contribute enough to get
d) you have a way of finding capital to contribute enough to get your income below the threshold from (a) above.
If your income would be above the threshold and you can contribute enough to get your income below the threshold, in 2010 you could get an extra $665 by insuring your adjusted family net income is below the threshold for the 2009 tax year. In 2011, you could get about half that for insuring your adjusted family net income is below the threshold in the 2010 tax year.
The thing that I’m not sure about is whether the “adjusted family net income” is reduced by increasing RRSP contributions. Does anyone know whether or not this is the case? I’ve been having a hard time finding a clear definition of adjusted family net income.
If this strategy might work, whether or not it would be worthwhile depends on several factors. Things to consider would be:
1. Your cost of capital to make the necessary contribution. For example, if you borrow from a line of credit, how much interest would you pay?
2. Whether or not your tax savings on the extra contribution drops you into a lower marginal tax bracket. If so, you should consider the delta in tax savings as a cost to implementing this strategy.
3. The amount by which you’re over the income threshold. If you are way over the threshold, factors 1 and 2 above are likely to wipe out the benefit of the payments you’d receive.
With the way the payments are phased out above the income threshold, there is essentially an additional 20% effective marginal tax rate applied to family income between $160,000 – $166,600 in 2009, and a 10% effective marginal tax rate applied to family income between $160,000 – $166,700 in 2010.
This is a large MTR, and if RRSP contributions can get that back, I think it is a strategy worth considering if you’re one of the people this might apply to!
Pardon my effective MTR numbers in the second last paragraph in my last comment. They should be 10% EMTR on 2009 income from $160,000 – $166,600 and 5% EMTR on 2010 income from $160,000 – $166,700 (not 20% and 10%).
@Returns Reaper: Very good point. I wrote about this when the Ontario Sales Tax Transition Benefit was tabled but it would make sense to remind readers that there is an extra bang for the buck for a RRSP contribution this year:
http://www.canadiancapitalist.com/get-the-most-out-of-ontario-sales-tax-transition-benefit/
“Adjusted” simply refers to adjusting the net income to exclude UCCB benefits. I’ll try and dig up a reference for the term; I found it on the CRA website.
@Calgary Investor: Yes. You can make a RRSP contribution on March 1st. The rule is you can make a RRSP contribution for the previous financial year in the first 60 days of the new year. 2010 is not a leap year, so RRSP season spills over to March 1st.
My partner and I are small business owners (and yes personal partners which most sane people should think twice about) and due to a sudden increase in revenue after many years of steady a growth pattern have found ourselves in great position of needing to offset taxes. We are equal shares owners and our CA has advised us to pull some money out and drop directly in RRSPs which is fine but here is my quandry: there is an age difference of about 15 years, and from everything Ive learned about investing this becomes a factor. My timeline technically is longer than his so do we invest differently/ separately? We also may be selling our business by the summer and my partner does plan on continuing private consult and or other work for the longterm. He is now going into his 60′s and is very healthy. Although Ive limited experience with investing I have educated myself over the last few years and some basic knowledge. Any thoughts would be appreciated.
@CC: Now that you pointed me to the link, I do recall reading that post. It was so long ago, I think I’d completely forgotten about it. I should have searched your site first. Good work!
Great post, totally agree! No need to rush, first put money in, then shop later.
I agree that pre-authorized setups are a much better way of planning one’s RRSP purchases.
Nice thread.
Good post CC, well said for those new to investing or non-couch potatoesque index investors. Couldn’t agree more. For those needing time to determine what type of security they want to invest in, better to “park it” instead of rushing into something.
One of the best decisions investors can make if they are going to make a RRSP contribution and have not planned their “purchases” is to simply move it in as a cash position. In light of the market momentum, this may serve as a double-bonus.
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[...] Canadian Capitalist had some great advice for Canadians: Don’t Rush Your RRSP Decisions. Check out these great suggestions for avoiding a “hodgepodge” of investments in your [...]
[...] Canadian Capitalist had some great advice for Canadians: Don’t Rush Your RRSP Decisions. Check out these great suggestions for avoiding a “hodgepodge” of investments in your [...]