Posts Tagged ‘Market’


Potential Dangers of RRSP. Yes or No?

January 29, 2011

Though I am being a bit derivative by posting this I thought it was a very important consideration for those of you who rely solely on RRSP’s strategies for their source of future wealth. I had not previously come across this research, or this thesis, but I believe it to be worthy of note.

Very briefly, it suggests that we are all told to invest heavily in RRSP’s in order to earn investment gains and defer paying tax until much later in life, when presumably your marginal tax rate will be lower (i.e. when you retire and have less annual income). It claims that this will do the investor no good since your tax rate may not actually be lower in the future. Either you will retain enough disposable income to maintain your MTR, or the Government of Canada will continue to increase the tax rates.  In either of these cases, it maintains, at retirement you will either see no taxable advantage or, in other cases, you may even lose money since your tax rate could actually higher than it was when you first begun making your contributions.

Yesterday (and coincidentally), I posted an article on Twitter (@nextgeninvestor) called “The Great RRSP//RRIF tax-grab” ( This article spoke about this exact phenomenon. In this case, retiring Canadians realized that they would lose money on their RRSP withdrawals due to the fact that the promised-lower-tax-rate-in-retirement was, in reality, actually higher. They claim the Government new this and conveniently raised the tax brackets to take advantage of a huge amount of the population having a huge amount of money in RRSP’s that it was soon looking to withdraw.  To combat this, the Reiterees actually withdrew everything, left the country, and became ex-pats. It is another interesting consideration.

Regarding these arguments, I will save my recommendations  for a later time. At this point I will allow you to draw your own conclusions. I will say, however, that it says nothing of income splitting (that is transferring your RRSP deposit to the lowest tax paying spouse)  and that it assumes a government increase in tax rates over time. Furthermore, I suppose that this would only effect those who are relatively close to the next tax bracket in the first place. For others, it would likely take a substantial increase in the rates by the Governenment to make it disadvantageous for them to not invest for a time when they will not be taking as much taxable income.  Whatever the case may be, it does make a good argument against having all your retirement eggs in one basket.

RRSPs and rising cost of government

By: Larry MacDonald

Tue, 25 Jan 2011 19:40:13 +0000

It’s generally accepted that persons in the lower tax brackets are better off contributing to TFSAs instead of RRSPs. But could all tax brackets be better off avoiding RRSPs? I’ve lately come across comments in discussion forums, blogs etc. that suggest as much.

RRSPs should be avoided by everybody, the comments say, because taxes seem to always go up – so by the time one gets to retirement, their tax rate will be higher than the rate at which they made RRSP contributions. Here’s a sampling of the comments, from 3 different persons:

1. “I wouldn’t sock away thousands a year in RRSPs like some people are doing…you save some income tax now, but when you retire, and start using your contributions, you will be paying more in income tax (I’ve never heard of the government lowering their taxes).”

2. “RRSPs are a form of gambling. You roll the dice that your tax rate in retirement will be lower than when you’re working – which was true for most people in decades past. But how can income taxes in Canada possibly stay at current levels, now that our national debt has erupted and the deficit made structural?”

3. “If taxes are going to go higher and higher over the next 10-20 years, then why should we put money in an RRSP just so that it will be taxed under those higher rates when we convert to a RRIF? Wouldn’t we be better off paying today’s taxes and investing outside the RSP?”

Could their fears be substantiated by future events? After all, the pattern over previous decades has been for tax burdens to rise.

According to the Fraser Institute’s Canadian Consumer Tax Index, the total average tax bill of the Canadian family has climbed from 33.5 per cent of income in 1961 to 41.7% in 2009 (if the large deficits in government finances during 2009 are assumed to represent deferred taxes, then the tax burden in 2009 is closer to 44% of income).

As the capacity for raising taxes on employment income nears exhaustion, new sources of tax revenue could be targeted, notably the billions of dollars held in RRSPs (which many think are the savings of the well-to-do). It might be assumed the voting power of retirees would render retirements benefits sacred cows no politician would dare touch — but it has been contemplated before.

In the early 1990s when Canada was dealing with a fiscal crisis, the federal government considered a number of measures to bring its budget deficit and debt under control. Two trial balloons floated involved imposing a capital tax on RRSPs and a capital levy on institutions administering RRSPs, as Hansard shows ( (search on “trial balloon”).



5 Secrets of Successful Savers – Alpha Consumer (

January 12, 2011

5 Secrets of Successful Savers – Alpha Consumer (

One of the most common questions I hear from readers of Generation Earn is how they can begin building financial security, especially when they’re still paying off student loans or other types of debt. After interviewing dozens successful savers over the years, many of whom are profiled in the book, I’ve noticed that they tend to have the following five traits in common. With the exception of the last one, they are all strategies that anyone can begin implementing today.

Here are the five secrets of successful savers:

1) They started slowly. Overcoming the initial inertia that prevents many of us from saving is often the hardest step. That’s why starting by saving just a small amount can get you on the path towards bigger savings. Nicole Mladic, a 31-year-old communications director in Chicago, couldn’t afford to put away a big chunk of her salary when she was in her mid-20s, so she started saving 2 percent. A few months later, she raised it to 3 percent, then went to 4 percent, and eventually reached her goal of 10 percent. Today, her net worth is over $90,000.

2) They read about financial and economic news. A survey by HSBC Direct found that people they call “active savers,” which make up about one in five Americans, tend to pay attention to financial news. That might help them maintain a general awareness and savviness about money, and also teach them about basic principles such the importance of not trying to time the market, and finding accounts that don’t charge hefty fees.

3) They save regularly, often through automated systems. Online banking makes this technique easy: Sign up for monthly transfers into a brokerage or savings account. You can also transfer funds directly from your paycheck so you never even see the money, which means you won’t miss it. Check in with your human resources department—you might be able to set up an automatic savings account through your paycheck in addition to your automatic retirement savings.

[In Pictures: 12 Money Mistakes Almost Everyone Makes]

4) They find saving pleasurable. This trait might sound counter-intuitive: How can anyone enjoy saving money, since doing so essentially prevents the pleasure of a purchase today? But some people—especially successful savers—naturally feel more pleasure while socking money away rather than spending it, since they know they are building financial security, and they can spend it one day in the future. If you don’t naturally feel this way about saving, you can teach yourself to, by focusing on how much financial security means to you each time you add to your savings accounts.

5) They first began saving as a child. The HSBC survey found that most active savers had been saving money since they were little and they learned the value of saving from their parents. While adults today who didn’t receive those lessons can’t change their past, they can help pass on better lessons to their own children by talking about finances and family budgeting often. Doing so would put them in the minority: A Charles Schwab survey found that only one in five parents frequently talk to their teens about family budgeting and spending decisions, and just over half of parents teach their teens how to save regularly.

One trick that combines these strategies is to encourage elaborate family discussions about what you will do with all the money you are saving. For example, if your savings goal is to take a family vacation to Belize, children can draw pictures of the rainforest, parents can crunch some numbers, and soon you’ll be snorkeling in the coral reefs.

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.


Pay yourself first.

January 11, 2011


Those who spend first and invest what’s left always end up working for those who invest first and spend the rest. Also, and most importantly, your money should be tied up in investments not assets.

With that in mind read an excellent, simple, and potent strategy below: (the experpt can be found at:

Pay Yourself First!

This means that the first priority when you earn money is to put some of it aside to save for your future.  This is the key to your financial freedom


bullet 10% of your gross income for making extra payments on your debt, or
bullet 10% of your gross income for saving or investing outside of an RRSP, or
bullet 15% of your gross income for making contributions to RRSPs.

The reason for using 15% for making RRSP contributions is to include your approximate tax savings in your contributions.


Your family income is $70,000 per year.  If you are using your pay-yourself-first money to make extra payments on your debt, you would use 10%, or $7,000.

If you want to contribute your pay-yourself-first money to your RRSP, you would contribute 15%, or $10,500.  If you are in a 30% tax bracket, your refund for the RRSP contribution will be $3,150.  This means you are out-of-pocket only $7,350.  If you are in a 40% tax bracket, your refund would be $4,200, and you would be out of pocket only $6,300.

So, in order to have approximately the same after-tax money as when you are using 10% of your gross income to pay down your debt or save outside of an RRSP, you will have to contribute about 15% of your earnings to your RRSP.  You can then do what you want with any tax refund.


Hold the Line?

January 7, 2011

From a Morningstar Analysis of fund holdings and duration:

Of the 59 one-year periods from 1950-2008, 16 resulted in a loss for their particular year. However, if you increase your holding period to five years, only 1 of the 55 overlapping five-year periods resulted in a loss. Moreover, none of the 45 overlapping 15-year periods from 1950-2008 resulted in losses. However, keep in mind that holding stocks for the long term does not ensure a profitable outcome and that investing in stocks always involves risk, including the possibility of losing the entire investment.


Additionally, I will state that the particular period in question may be biased due to the boom that followed WW2 and the potential anomaly of the technology boom that has been relevant for the last 50 years. These factors may not hold true for the next 50 years, which occur under different dynamic circumstances. However, if we consider poor market timing scenarios and the fact that transaction fees and other factors generated from excessive positioning and repositioning (various frantic buying and selling) eat into return yields, a positive trend over the long term from a holding position is a more realistic assumption than a series of educated and subjective selections subject to personal skilll alone.


Loans, Mortgages, Credit Cards,Debt items, etc

December 9, 2010

Always protect outstanding balances through purchasing insurance coverage that covers the amount and the duration of the liability. For example: If your Mortgage is payable in 20 years and you owe 300k, purchase a 20 year Term policy with a face value of 300k. This is remarkable cheap to purchase and is not only responsible (if you care about your family..ha) but necessary in some cases. Do the same for Lines of Credit, Credit Cards, and so on. If you already have it in place with the bank, you will be shocked at how much you are overpaying for a different type of coverage. Always, and I mean always, buy private coverage for these items through your investment advisor because bank sponsored Creditor Insurance (another name for what I am talking about here) is over priced, depreciates in face value, cannot be transferred to a permanent policy (as can Term Policies; and no medical is needed upon conversion), and goes to your beneficiary when/if you die so that they can pay off the debts and keep the difference. I paid 56 dollars a month for insurance for a 15000 dollar line of credit. I paid this same amount (despite depreciating loan values) for over 10 years. Once the loan was paid off, I lost the coverage that I had (foolishly) paid over 6000! dollars for (think about it, paid 6000 dollars insurance on a 15000 dollar loan. Now I know better. You can get about 500000 dollars coverage (Term 20) for like 40 dollars a month (if you’re in your 30’s) and you can transfer it to a permanent policy or cancel it once your debt is paid off. Think of the math on that.


Emergency fund: TFSA all the way.

December 9, 2010

Even if you can withdraw from your Mutual Fund without a fee you would be WAY better off using a TFSA for emergency money because money withdrawn (principal and/or growth) is NOT included as income for the year as it would be for Mutual Fund withdrawals:

Hence the money is taken “tax free.”

The only caveat is that (unless you use a withdrawal and carry-forward strategy, which I will talk about later) your TFSA contribution room is only 5k.

It is vital that you avoid taking any income that will be included as income for tax purposes. There are many ways to save and grow income without affecting your taxable income. There are even other ways to take money and have it reduce your taxable income (hence the RRSP).

For example: If you are receiving a taxable lump sum (like severance or salary bonus etc) and you suspect that you may need to utilize the money for living expenses, you should never ever deposit it into your bank account. You should look at one of the following strategies:

1. Retiring allowance:
Revenue Canada allows you to shelter money into what’s called a retiring allowance as part of the Income Tax Act. So long as your company qualifies — it must have a payroll of more than $2.5 million and one or more employees severed within the past six months — you can shelter $2,000 per year, for each year of service up to and including 1995 (even if you started work in November or December, for example, part years count as full years; therefore you can shelter the full amount for that year). For example, if you were hired in 1985 and severed in 1997, you would qualify for 11 years of sheltering.

2. Transfer to RRSP
Suppose you determine you’ll have $10,000 remaining after your retiring allowance options are used. And to keep the exercise simple, also suppose you have $10,000 of RRSP contribution room available for the year. You can ask your employer to take that $10,000 and put it into your RRSP (the employer must get Revenue Canada’s approval to do so through a letter). At year end, the company will send you a slip that says they paid you $10,000 with no taxes withheld. Normally you would claim this as incomfor the year and pay taxes on it. But try to arrange to have the employer pay out this money the following year. That way it becomes income for 1998. And if you arrange for the RRSP transfer described above, you will have all this money tax deferred in 1998, meaning you can claim this contribution on your 1997 tax return, lowering your taxable income. In other words, you’ve made a healthy RRSP contribution at a time when your income is high and you have money growing tax deferred, a big help as you search for a new job or make other plans. Should you have to draw on these funds, you may be taxed at a lower amount, and when funds are especially tight, it’s nice to know you’ll be giving less to the government.

3. Reduce taxes
Assume you have expenses of $2,500 a month and you have $5,000 in savings. If you think you could be out of work for some time and you don’t have the cash reserves to weather the storm, you may want to use your severance pay another way. Instead of taking this money in cash, you could put it all in an RRSP. If you don’t, be forewarned that Revenue Canada is going to tax it quite heavily; at a minimum 30 per cent. And, should you find a job sooner than expected, you’ll have just given Revenue Canada 30 per cent for nothing. Try rolling the payment into a short-term money market fund inside an RRSP. When your two months worth of savings have run out, you can begin to draw from the funds. Continue to pull out the same $2,500 as long as you need it, keeping in mind you’ll only pay tax on the amount you take out; anything under $5,000 is taxed at 10 per cent withholding tax. When you find your next job, roll the remaining money into something long-term.