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RRSPs: Successful Investing Through Tax Sheltered Investments

RRSPs: Successful Investing Through Tax Sheltered Investments



Explanation of the benefits of an RRSP and comparison of RRSP investments vs. Real Estate Investments

Explanation of the benefits of an RRSP and comparison of RRSP investments vs. Real Estate Investments



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    RRSPs: Successful Investing Through Tax Sheltered Investments RRSPs: Successful Investing Through Tax Sheltered Investments Presentation Transcript

    • Successful Investing throughtax sheltered investments By: Aleem Visram, HBA, MBA, IFICMulti Insurance Retirement & Financial Planning avisram@mirfp.com www.mirfp.com
    • Multi Insurance Retirement & Financial Planning Holistic approach to include a customized plan with a broad range of financial planning strategies to cover all your financial needs, including:  Retirement Planning – A solid plan can make the difference between a comfortable retirement and one that is inadequately financed. This includes RRSP, RESPs, TFSAs and Mutual Funds.  Tax Planning – Looking for investment opportunities to help reduce tax liabilities  Estate Planning – Ensuring that you have greater control of your assets and preserve them from unnecessary legal and tax costs upon death  Insurance- Ensuring that you and your family have adequate life, critical illness and disability coverage to provide you with sufficient funds in the event of an illness or death
    • Multi Insurance Retirement & Financial Planning As Independent Advisors we work with all these companies: We will provide you with the best rates available in Canada
    • Why do you need to worry aboutretirement planning now?  In 2011 over 59% of retired Canadians don’t have enough money for their retirement  The average Canadian over age 65 spends $51,000 per year  Old Age Security and CPP only provide an average of $13,272 per year  You need a gross pre-tax earnings of approximately $90,000 per year to receive a net after tax income of $51,000 per year  The CURRENT average life expectancy of a male is 83 years and a female is 85 years  If you live to the average Canadian age and spend the average $51,000 per year, you will need $1.5 million to $2 million in retirement income
    • Avoid the Tax Man!In Canada you pay taxes on your HIGHEST income first,so the more money you make, the higher taxes you pay Income Income Taxes Over $128,800 46% $83,088- 43% $128,800 $78,361- $83,088 39% $75,550- $78,361 35% $66,514- $75,550 33% $41,544- $66,514 31% $37,744- $41,544 24% Up to $37,744 20%Avoid paying high taxes through tax deferred savings
    • Why should I invest in RRSPs? Tax Benefits:  Income tax is deferred until the money (and earnings) are withdrawn at retirement.  Your money compounds annually with tax free growth  At retirement, your annual income (including money withdrawn from your RRSP) will likely be lower than your income today.  Therefore, you will be earning in a lower tax bracket, which means that a smaller percentage of your income will go to taxes.
    • Special RRSP FeaturesAdditional Benefits: Home Buyers Plan (First Time Homebuyer)  Up to $25,000 can be borrowed from your RRSP to buy a home, without counting the withdrawal as income  If you and your spouse each have RRSP, you can borrow up to $50,000 between two of you if taking joint ownership  Must be repay loan (no interest) within 15 years. Lifelong Education Plan  Allows you to withdraw a maximum of $20,000 for education/tuition.  Must be repaid within 10 years. 6
    • RRSP vs. Non RRSP RRSP made almost $175,000 more!!!Savings program based ona monthly contribution of $200 $455,865for 30 years at an annual rate Growth outsideof 10 per cent into a Registered an RRSPRetirement Savings Plan Growth within(RRSP) an RRSP $281,192 $153,139 $113,952 $36,173 $41,310 10 years 20 years 30 years
    • The Power of RRSPs and Compounded Interest Example: Sara is 30 years old and makes $100,000 per year. She wants to retire at age 65 and is wondering if she should invest in RRSPs for tax savings.Tax Shelter vs. No Tax Shelter InvestmentsItem No RRSPs RRSPSGross Income $ 100,000 $ 100,000 Less: RRSP Contribution (18%) $ 18,000Taxable Income $ 100,000 $ 82,000 Tax (assume 40% Marginal Tax Rate) $ 40,000 $ 32,800 Net Earnings after Taxes $ 60,000 $ 67,200Annual Income Tax Refund $ 7,200Net After Tax RRSP Contribution $ 10,800Tax Savings at Retirement (age 65) $ 252,000Contribution by Age 65 (after Tax Refund) $ 378,000RRSP Value at Age 65 (6% Compounded Interest) $ 2,126,176
    • Is it better to pay down my debt or borrow money for an RRSP? Example: Sara is wondering if she should borrow $10,000 from the bank tocontribute to her RRSPs, or use the money to pay down extra towards her debt. Borrow Money for an RRSP Pay Down extra to your debts  Get a line of credit for $10,000 at (mortgage, student loans, line a current rate of 3% to 4% will of credit) cost $300 to $400  $10,000 contribution on a debt  Using the $10,000 loan to invest in with a current rate of 3% -4% will RRSPs will result in an immediate result in a savings of $300- $400 tax refund of $3,000- $4,000, which is a 30% to 40% return on WHICH WOULD YOU PREFER: the principal $3,000- $4,000 each year or  Sara can use the tax refund to pay $300- $400 each year? back the loan or pay down her mortgage  Sara’s $10,000 RRSP contribution will also grow tax deferred with compounding interest
    • Borrowing for an RRSP The Benefits of Using a Loan to ContributeBorrow $10,000 to contribute to your RSP $10,000Return on $10,000 RSP investment at 6% for 1 year: $600 for 10 years: $7,910 for 40 years: $92,860Repay loan over 12 months - total of $10,330paymentsLoan interest paid over the 12 months $330
    • Real Estate vs. TSX (no compounded interest as in an RRSP)Between 1996 and 2010, the TSX increased by 147%. Not including dividends.Between 1996 and 2010, the average Canadian house price increased by 140%. 11
    • Real Estate Investment Considerations Canadians have record debt: income ratios of 165% (US is below 150% average) → higher vulnerability Interest rates are at all time low (Over 10% in 1995 to only 3% now) → if interest rates increase consumers with high debt levels will not be able to afford their mortgages Only primary residences are tax free when sold, but if you sell your primary residence you will have to buy a new home at the same time, negating the potential gains (unless you move back in with your parents ;-) All investment properties are subject to capital gains taxes of 50% → e.g. if you sell your house and make $100,000 profit, 50% is taxable, i.e. you will pay $23,000 in taxes, reducing your net gain to $77,000
    • Mortgage vs. Life Insurance Item Mortgage Insurance Life InsuranceCoverage value Amortized over the period of Remains the same throughout the insurance (e.g. 25 years) and insurance period, regardless of decreases as mortgage is paid home valueInsurance Rates Only standard smoker/ non- Preferred and elite rates make term smoker rate options insurance up to 33% cheaper than mortgage insuranceOptions Limited options with banks as Ability to shop around with multiple they only use one carrier carriers for cheaper ratesSelling property/ Insurance ends once house is Insurance coverage remains oncebuying a new sold. Need a newmortgage property is sold. The owner gets thehome insurance for a new home. value of the house sold PLUS the insurance premiumDeath benefit Insurance used to pay off Full insurance goes to beneficiaries remaining mortgage with no to allocate at their discretion, they balance left for beneficiaries. can keep the house, sell it or rent. Joint first to die coverage. Individual or joint coverage options.
    • Final Tips: Investing 10 Commandments1. If you haven’t started saving, start now. It’s never too late to invest.2. Invest early and often and take advantage of the ‘time value of money.’3. Choose mutual funds and put your money in the hands of professionals who have the investment know-how to help you reach your goals and retirement.4. Maximize your RRSP Contribution to take advantage of your single greatest opportunity to defer taxes and save for retirement.5. Don’t be too cautious and choose all low-risk investments or too aggressive and choose all risky investments. A diversified portfolio should include a variety of assets to minimize risk and maximize return.6. Think long-term instead of letting short-term market volatility sway your investment decisions.7. Take advantage of ‘dollar-cost averaging’ with a pre-authorized chequeing (PAC) withdrawal that spreads your mutual fund purchases over time through manageable monthly contributions.8. Use an RRSP loan to maximize your tax refund if you don’t have savings.9. Transfer your non-registered investments to an RRSP for tax savings.10. Don’t wait until the deadline to submit your RRSPs- its better not to be rushed! 14
    • Questions? Contact me: Aleem Visram, HBA, MBA, IFIC Owner, MIRFP Financial Planning Cell: (647) 986-9163 E-Mail: avisram@mirfp.com