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How yourrrs pscouldruinyourretirement


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How Your RRSPs Could Ruin Your Retirement

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How yourrrs pscouldruinyourretirement

  1. 1. How Your RRSPs Could Ruin Your RetirementAll those idyllic beaches, beaming retirees and washed-up superheroes on your TVscreen can mean only one thing: RRSP season is close at hand.Truth is, if youre a high-income earner who favours a portfolio packed withhigher-risk, higher-return equities, putting money into RRSPs doesnt make senseat all.RRSPs have their drawbacks for business owners and entrepreneurs as well!On Oct. 18, 2000, Paul Martin brought down the mini-budget and cut the capital-gains tax rates for the second time in a year. This absolutely tips the scales infavour of non-registered portfolios.Canadians are now taxed on just half of their capital gains, down from 75% theyear previous to the budget. Now, of course, gains within your RRSP arent taxedat all — until you begin withdrawing from your plan, when RRSP savings are taxedas regular income.Since many entrepreneurs will find themselves in the top tax bracket uponretirement, theyll have to surrender almost half their RRSPs value to the taxman!Meanwhile, holders of non-registered portfolios benefit from the lower tax rates oncapital gains.Lets use a fictional investor to illustrate this point.Heather, 40, runs a successful call centre in Ontario that pays her enough toqualify for that provinces highest marginal tax rate: 46.41%. She begins investing$10,000 a year in an RRSP comprising equities and equity mutual funds.Each year, she sells 25% of her portfolio and reinvests it all. Assuming annualreturns of 10%, her portfolio will be worth about $1,082,000 by the time shecollapses it at age 65. Not bad for 10 grand a year.But wait: if Heather converts the whole portfolio into cash and takes the resultant46% tax hit, shes left with around $580,000. Sure, shell likely move her pre-taxportfolio into a post-RRSP shelter, tapping it as her budget requires. But even ifshe pulls out amounts small enough to drop her tax rate to 33%, her after-taxportfolio will be worth just $757,000.Now watch how well her unregistered portfolio performs. Even though Heather has Mark Huber 2010. All Rights Reserved 1
  2. 2. to pay her marginal rate on half of her realized capital gains each year, after 25years her portfolio will be worth $992,000. But even if Heather cashes in the wholelot, she pays tax on just half of her capital gains.Her final balance: $850,000 and she still has the option of selling her portfoliomore slowly to cut her tax bill even further.Caution: RRSPs are not all downside. Since the taxman treats all interest incomeequally, your interest-bearing investments will pay more within an RRSP.(Sheltering your interest-bearing portfolio while holding equities outside your RRSPis a good option.)Theres also the generous tax break on your annual RRSP investments. Over 25years, Heathers RRSP contributions cut her tax bill by $116,000 — but still notenough to close the gap with non-RRSP returns.However, entrepreneurs need fast access to capital for business emergencies,which fixed-income investments and RRSPs dont provide. The owner-operatordefinitely should have cash that they can get their hands on pretty quickly thattheyre not going to have to pay 50% tax on.They might have opportunities to invest in their businesses that would beunavailable if they put their money in RRSPs, and which would represent higherpotential returns than would investing in an RRSP.If you want to start moving funds out of an RRSP, here’s a way to minimize thehit:Borrow $100,000 and invest that. Assuming and interest cost of 8%, its going tocost you $8,000 a year in interest, [which is] tax-deductible, to borrow thatmoney. Take $8,000 out of your RRSP every year, [which is] fully taxable,cancelling it with the deductibility of the interest on the loan.Youre actually taking $8,000 a year out of your RRSP tax-free to pay the intereston the money you borrowed for an investment outside your RRSP. So you have$100,000 of someone elses money thats invested for you, and its not costing youanything.Of course, low capital-gains taxes might not last forever. Then again, who says theRRSP tax credit will stick around?(Its kind of interesting that the national debt is equal to the amount of tax owedon deferred registered retirement and pension plans. Its not that Im paranoid...) Mark Huber 2010. All Rights Reserved 2
  3. 3. Your next stepContact us for your personal and confidential “tax busting” appointment!Phone: 604-207-9970Email: askmark@WeSaveYouTaxes.comWho Is Mark Huber?Mark Huber, CFP, AuthorMark Huber is a practicing certified financial planner (CFP) with over 22 years ofexperience in the industry.Mark’s boutique planning practice works with a select group of clients who are allshare a passionate vision for creating true wealth and living their dream lives.Mark has made powerful and innovative tax reduction, cash flow and mortgagereduction strategies core disciplines in his successful practice and also the corewealth creation process for his clients.Contact Information:Mark Huber, CFP Mark Huber 2010. All Rights Reserved 3
  4. 4. SetForLife Financial Services8380 Ash StreetRichmond, B.C. V6Y 2S3Office Tel: 604-207-9970Office Fax: 604-207-9971E-mail: askmark@WeSaveYouTaxes.comSuite 2050-1050 West Pender StreetVancouver, B.C. V6E 3S7Office Hours are Monday-Friday9:30am to 4:30pm PST.Or "by appointment"Other Sites by Mark Huberhttp://WeSaveYouTaxes.comhttp://HowToBeSetForLife.comhttp://HowToGetRidOfYourMortgage.comhttp://HowToUseInsuranceToCreateWealth.comFollow On Twitter On Facebook 2010 SetForLife Financial Services. All rights reserved worldwide.Neither Mark Huber, SetForLife Financial Services assume any liability whatsoeverfor the use of or inability to use any or all of the information contained in MarksWeb Sites, Blogs, emails, ebooks, Podcasts, audios, teleconference calls, reports,broadcasts and newsletters.The information expressed and contained in Mark Huber’s Web Sites, Blogs,emails, ebooks, Podcasts, audios, teleconference calls, reports, broadcasts andnewsletters are solely the opinion of the author based on his personal observationsand 22 years of experience in the financial services industry.As with anything involving investments and investing strategies, you agree toalways consult with your professional adviser before making any investmentdecisions.Use this information at your own risk. Be responsible! Always do your owndue diligence. Mark Huber 2010. All Rights Reserved 4