RRSP’s – Are they for you?

RRSP’s – Are they for you?

RRSP’s, as attractive an investment for your retirement as they are, may not always be the best course of action for you. Why? There may be certain factors involved. Here are some highlights of what I mean:.

Income level – If you are a lower income earner, especially if you earn less that the Basic Personal Amount exemption claimable on your federal tax return, there are no immediate tax benefits from contributing to an RRSP in the contributing year. This is because their exemption has already excused them from paying any taxes federally at all! Although you can carry forward a contribution into future tax years, this is still not necessarily your best investment strategy. For 2010, the Basic Personal Amount is $10,382. I have actually completed tax returns to some of my clients in past years and told them their RRSP contributions did not help get any tax credits in their tax returns!

Debt load – If you have a heavy debt load – loans, mortgage, credit card debt, etc., you are better off focusing on eliminating many of these debts first. Debt, especially credit card debt, most often carries higher interest rates than you could possibly get from an RRSP contribution. Eliminating bad debt is (i.e. consumer debt like: credit cards and payday loans), in my opinion, a higher priority. Once your debt load is under control, re-consider investing in RRSP’s once again.

Age – If you are in your later years and close to retirement, starting an RRSP program may not be the best program for you. Although you may benefit from the tax break on your tax return, the long-term benefits may be no benefits at all. #1 Younger people (I mean before age 40) have the power of compound interest working for them, therefore needing less money needed for contribution, they younger they are, the easier it is to grow interest in an RRSP. #2 Money invested in an RRSP will be eventually needed to be claimed back as income again after age 71. This could render an otherwise eligible senior recipient lose a qualification for the Guaranteed Income Supplement (GIS) on their Old Age Security (OAS), or cause a “clawback” on their OAS, since the federal government only allows a certain income level be achieved before clawback rules come into effect on their OAS.

Fortunately, there are other strategies to planning for retirement, and for 2009 and thereafter the federal government has introduced a product to help that cause – Tax Free Savings Accounts, or TFSA’s, as they are better known.

To get a good retirement program in place – plan well, have a budget, and talk to your financial advisor. Also, check Seianna Financial Services audio series on how to wisely spend and save your money!

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