DiscoveryFinance.Com » Investment Strategies

Home Buyers’ Plan (HBP) – how to maximize this plan

Ryan A. Smith — Mon, 03 Aug 2009 17:59:46 +0000

Before we begin this topic, we will briefly discuss how HBP works. Then we will talk about how to maximize this tax-saving strategy toward the end of this article.

Home Buyers’ Plan (HBP) allows first-time homebuyers to withdraw RRSP to purchase or build a home without having to pay tax on the withdrawal.

RRSP Withdrawal Limit for HBP

Individual: $25,000
Couple: $50,000

The HBP withdrawal limit has increased to $25,000 from $20,000. This applies to withdrawal made after January 27, 2009. It will allow a couple to withdraw up to $50,000 from their RRSP funds toward the purchase of their first home.

This is the first increase in the withdrawal limit since the HBP was introduced in 1992.

Amounts withdrawn are repayable in installments over a period not exceeding 15 years, starting the second year following the year the withdrawal was made.

Eligibility

First-time homebuyers are eligible, provided that the home to be purchased or built is the principal place of residence. An individual is generally considered a first-time homebuyer if the individual did NOT owned another home in the year the HBP withdrawal is made, or in any of the four preceding calendar years. In other words, if you bought a home 5 years ago, you will still be a first-time homebuyer provided the new home will be your principal residence.

Special HBP Tactics

If you withdraw your RRSP toward your first home under the HBP this year, you can utilize HBP again after another 4 years! That’s a income tax saving on the withdrawal amount $25,000 (ie, a tax saving of $3750 at the lowest income tax bracket 15%)!!! What you have to do is…declare your new home as the principal residence and your previous home as rental property. Sweet. Oh yeah, repeat this tactic every 5th year.

Reference: Canada Revenue Agency

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RBC VISA TFSA Reward – is this cashback feature worth your points?

Ryan A. Smith — Sun, 05 Jul 2009 07:36:32 +0000

Last month, when I received my RBC VISA card monthly statement, I saw an advertisement about redemption of RBC Rewards points toward TFSA. Seems very interesting, but is it worth a try? I decide to take a close look.

Here is the advertisement:

RBC Rewards points can now be redeemed toward your Tax-Free Savings Account (TFSA). Redemptions start with a minimum of 12,000 points for a $100 RBC Registered Rewards voucher. For each additional 3,000 points you redeem, you will receive an extra $25 in vouchers. Not only do investment earnings grow within the TFSA tax-free, there are multiple investment options and no tax when you withdraw your funds. Visit www.rbcrewards.com/tfsa to redeem and start saving today.

Now let’s consider each of the RBC VISA cards that offer RBC Rewards points.

RBC VISA cards with annual fees

Earn 1 RBC Rewards point for every $1 spent.
Annual fee ranges from $15 to $120: Visa Classic II Student $15, Visa Classic II $35, Visa Gold Preferred $110, and Visa Platinum Avion $120.
Cashback Analysis: To receive $100 TFSA, you have to spend $12,000 on your VISA card. This gives you a cashback rate of 0.83%. This cashback rate will be even lower if you consider the annual fee you have to pay; eg, 0.71% cashback rate for Visa Classic II Student, and -0.17% cashback rate for Visa Platinum Avion (please note it’s minus! ).

RBC VISA cards with no annual fees

Earn 1 RBC Rewards point for every $2 spent.
Annual fee $0: RBC Rewards Visa Gold and RBC Rewards Visa Classic.
Cashback Analysis: To receive $100 TFSA, you have to spend $24,000 on your VISA card. This gives you a cashback rate of 0.42%.

Conclusion

Whether RBC cards have annual fees or not, the cashback rate of return is very low, compared to other Top Cash Back Credit Cards. Therefore, you might consider using the points for other things.

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RRSP – Maximize Your Retirement Savings

Ryan A. Smith — Fri, 12 Jun 2009 01:23:08 +0000

What’s an RRSP

Registered Retirement Savings Plan is a retirement plan that you or your spouse or common-law partner establish and contribute to. RRSP contributions are tax-deductible;ie, it can be used to reduce your income tax.

RRSP vs CPP

Why should I invest in RRSP when I can get CPP (Canada Pension Plan) benefit at retirement?
Reason: CPP – small plan, big potential?!

RRSP vs TFSA

What are the differences between RRSP and TFSA (Tax-Free Savings Account)?
See this article: RRSP vs TFSA.

RRSP vs IPP

For anyone who has reached their annual RRSP maximum limit and would like to attain more tax-deductible retirement savings than what their RRSP can offer, it is POSSIBLE with IPP option which allows an even more attractive contribution room than RRSP does!
See this article: IPP – Supersize Your Retirement Savings.

RRSP Contribution Deadlines

March 1 of the following year is the deadline for contributing to an RRSP for the current tax year; eg, March 1, 2010, is the deadline for 2009 tax year.

December 31 of the year you turn 71 is the last day that you can contribute to your RRSP.

How does the Government Calculate My RRSP Contribution Room?

It’s based on your “earned income,” not Total Income (line 150), Net Income (line 236), Taxable Income (line 260), or Gross Income.
See this article: How to Calculate RRSP Contribution Room.

How Much Do Others Contribute To Their RRSPs?

See this article: RRSP – national average annual contribution.

What Types of Investments is Better for RRSP?

RRSP is a registered plan; ie, the income earned is tax-deferred till you withdraw the fund during your retirement when your income will be in the lower tax bracket. Because of this, it is better to place RRSP in the investments that generate interest income which can be taxed as high as 45%, according to your tax bracket of that year.

In contrast, although investment earnings outside a registered plan are taxable, you can reduce the tax on investment income by focusing on investments that generate primarily dividends and capital gains, which are taxed less heavily than interest income. The tax on dividends and capital gains is usually around 25%.

What Can You Do With Your RRSP Fund?

Home Buyer’s Plan (HBP): Withdrawing your RRSP funds to buy or build a qualified home.
Lifelong Learning Plan (LLP): Withdrawing your RRSP funds for continuing education or retraining.
Registered Retirement Income Fund (RRIF): Transferring your RRSP funds to RRIF when you turn 71.

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IPP – Supersize Your Retirement Savings

Ryan A. Smith — Tue, 09 Jun 2009 00:30:34 +0000

Many Canadians have seen their RRSPs take a significant toll in the markets during this Global Recession. Most can do little more than hope for a quick recovery. But there is another option. It’s called Individual Pension Plan (IPP).

What’s IPP?

IPP stands for Individual Pension Plan. It is perhaps the least known, yet most effective tax reduction strategy available in Canada. IPP is a tax-driven registered pension plan catered to individuals who would like to accomplish more retirement savings than what an RRSP can offer.

For example: In 2004, a 50 year old who commences an IPP could have a maximum contribution of $113,300 compared to a maximum RRSP contribution of $15,500. Therefore the IPP has a tax deductible advantage of $97,800.

Start your own IPP, magnify your retirement income and save thousands of dollars in tax—what could be better?

Who Should Start an IPP?

Business owners, their families, key executives, and professionals with Professional Corporations, provided that the sponsoring company is incorporated.

The key candidates for IPP are usually corporations that are looking for additional retirement savings opportunities for their business owners, incorporated professionals, or highly-paid executives, provided that they are at least age 35 and have a history of maximizing their RRSPs. The corporation makes the contributions to your IPP and it can deduct the amounts contributed against business income to obtain tax savings for the corporation. All costs associated with the pension plan are tax deductible to the company.

Age is the key determinant for IPP—the older the IPP member, the higher the contribution amount. IPP contributions first exceed RRSP contributions around age 35. However, the advantage on a current year basis is relatively small at age 35, so there are not many IPPs set up at that age, given the higher maintenance cost for IPP vs RRSP. Most IPPs are implemented for individuals who are between the ages of 45 and 60.

The ideal IPP candidate is over 45, has an annual income of more than $100,000 and plans to work at the same level until retirement.

How does IPP work?

The rules are complicated, the concept is simple. The Pension Act allows a corporation to set up an IPP for an owner or key employees. Funds are contributed to the IPP by the corporation from income or retained earnings. Those payments are a tax deduction for the corporation (the plan sponsor) and roll tax-free into the IPP for the plan members. The individual will eventually pay taxes when the funds are drawn out of the IPP during retirement, similar to an RRSP.

How is IPP calculated?

An IPP is a one-person, defined benefit pension plan. It is designed to provide a predictable retirement income. Funding contributions are calculated by an actuary, based on your current age, salary, years of employment with the corporation, past RRSP contributions, and projected age of retirement.

Your annual income at retirement age is calculated using:

Your career T4 or pensionable earnings
Your age
Assumptions determined by the actuary, which are acceptable to CRA

Examples of Actuarial Assumptions:
In an IPP, the assets are expected to grow at 7.5% per annum. The annual contributions compounded at a 7.5% net annual rate of return will ensure your plan has adequate assets to provide your retirement benefits.

A valuation is required to be completed every three years by your actuary to ensure the plan is being funded properly to provide you with a pre-determined annual benefit at retirement.

Your corporation (plan sponsor) can contribute more to the pension plan if the triennial actuarial review identifies investment rates of return of less than 7.5% per year since the previous actuarial review. This tax-deductible additional funding can be made over a period of up to 5 years. If a surplus is generated in the plan, the sponsoring corporation may be required to take a contribution holiday.

Determination of Pension Benefits:
The benefits are based on 2% of indexed earnings for each year of service up to the maximum pension limit for connected persons for years of service after 1990. A connected person is defined in the tax legislation as an individual who own directly or indirectly 10% or more of any class of shares of a company or an individual who does not deal at arm’s length with such a person. The arm’s length test would make the spouse, parent or child of a connected person also a connected person.

An IPP can thus be established for your spouse, which could allow for income splitting before and after age 65. Assets in an IPP are also exempt from the claims of creditors in most circumstances.

For those who qualify, an IPP may be the ideal way to supersize retirement savings. Not only does it allow you to contribute more to your retirement fund than an RRSP, it offers significant tax savings and gives you greater control oer the outcome—sheltering your wealth from external factors that are beyond your control.

Advantages and Disadvantages of IPP

Advantages

A higher contribution limit (higher annual tax-deductible contribution limits for older people)
Unlike an RRSP, there are no preset contribution limits to an IPP. In fact, the older you get, the larger your contributions can be. This allows you to build retirement savings faster in a tax-free environment, which can result in a significantly higher pension income.
Past-service funding (ability to top-up past service contribution)
When an IPP is established, past service contributions allow you to catch up for any previous years of employment with the company going back to 1991. This allows a cash rich corporation to move money into a tax shelter. A portion of your existing RRSP may also be used to start your IPP without penalty.
Guaranteed retirement income (ability to make further tax-deductible contributions if there is a deficit)
If your RRSP loses money, you’re out of luck. With an IPP, the corporation agrees to make up any shortfall to ensure the defined benefit is met. An actuary will valuate the fund’s performance every three years.
Any surplus is yours
If your IPP over performs, the surplus remains with the fund.
Tax deductibility (interest on funds borrowed for contributions is tax-deductible, unlike RRSP)
Contributions made to the IPP are tax-deductible for the corporation. Interest and expenses associated with managing the IPP are also deductible.
Creditor protection (more creditor-proof)
IPP benefits are protected from creditors.
Higher investment standards
Like an RRSP, IPP assets can be invested in stocks, bonds, mutual funds, pooled funds, term deposits, and GICs. However, no individual security may exceed 10 per cent of the fund on a book value basis at the time of acquisition.
Contribution opportunities for termination or early retirement
Contributions can be made within 120 days after corporate year-end

Disadvantages

IPP funds are locked in (no access to funds while employed)
Unlike an RRSP, access to your IPP funds will be restricted until retirement.
Higher start-up and administrative costs (initial set-up and on-going actuarial reviews)
Because the set-up and ongoing administration of an IPP requires the expertise of an actuary, start-up and annual operating costs are higher than those associated with an RRSP. These fess are, however, tax deductible to the corporation.
No lump sum cash available; benefits are locked-in
Mandatory annual minimum contribution except for exempt provinces (BC/MB/PEI/QC)

Is an IPP right for you?

An RRSP is still a wise savings strategy for young professionals just starting out. But if retirement is only 10 to 15 years away, now may be the perfect time to consider setting up an IPP.

IPPs are already the private pension plan of choice for more than 8000 Canadians, and their popularity is growing among upper-income business owners and professionals looking to retire on their own terms.

To find out if an IPP is right for you, speak to a knowledgeable financial advisor who can determine if you are a suitable candidate and ensure that the plan is properly established and maintained.

Additional readings:
1. Individual Pension Plan (IPP)
2. Individual Pension Plan (IPP)
3. The IPP Advantage

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RRSP vs TFSA

Ryan A. Smith — Wed, 03 Jun 2009 13:45:47 +0000

Which investment is better—RRSP or TFSA? This article will highlight some important differences, flexibilities, and restrictions.

Registered Retirement Savings Plan (RRSP)

Eligibility: Any Canadian residents with earned income.
Contribution Limit: 18% of earned income to an annual maximum ($21,000 for year 2009; $22,000 for year 2010); unused contribution room is carried forward and accumulates in future years.
Tax Deductible: Contributions are tax-deductible and reduce taxable income.
Earnings: tax deferred till withdrawn.
Withdrawals: Withdrawals are added to taxable income and subject to tax; furthermore, withdrawals can not be put back into RRSP in future years unless they are for Home Buyers Plan (HBP) or Lifelong Learning Plan (LLP).
Additional Notes: RRSP must be converted to a retirement income vehicle at age 71.

Tax Free Savings Account (TFSA)

Eligibility: Canadian residents age 18 or older.
Contribution Limit: $5,000 yearly (does not depend on earned income); unused contribution room is carried forward and accumulates in future years.
Tax Deductible: Contributions are not tax-deductible; ie, you pay tax on the amount you put into TFSA.
Earnings: Investment income earned in a TFSA is tax-free.
Withdrawals: tax free; withdrawals made in the previous year will be added to your contribution limit for the current year.
Transferability: There is no TFSA spousal plan. Individuals can provide funds to their spouse or common-law partner to invest in their TFSA, up to the spouse’s or common-law partner’s available room. TFSA assets can generally be transferred to a spouse or common-law partner upon death.
Additional Notes: Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit (CCTB), the GST Credit, the Age Credit, Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits.

Reference: TFSA