Poll:RRSP 101 (All RSP questions answered) | |||
Choice | Stats | ||
I find this info useful, thanks. | 83% (20) | ||
this is basic info, i know this already! | 17% (4) |
Poll:RRSP 101 (All RSP questions answered) | |||
Choice | Stats | ||
I find this info useful, thanks. | 83% (20) | ||
this is basic info, i know this already! | 17% (4) |
Hi VJ,
I also remember saying you bought a home, so if you used your RRSPs at that time for the HBP, you can also contribute to the return of that, if you have surplus dough, over and above the contribution I gave you in the last post
deleted..
Quote:
Originally posted by VJ
Hi Investpro,
You know a lot about this small person. How??? (ha ha).
The $2200 contribution room is from my last years N.O.A, so it means I can invest only upto that amount in this year, right? You have added $11600, which will become my contribution room for the next year and would be shown in currents year's N.O.A.
can you elaborate on this labor sponsored funds and LSIF limit etc...?
Yes, I bought the house last year and I think I would be able to get some credits from the related heads.
And lastly, have I met you before?
Rgds,
Vj.
Ok this info is for all even though VJ asked for it
January 2, 2007, the Ontario Government announced that it has increased the maximum investment amount eligible to receive 15% in tax credits to $7,500.00 Additionally, the Ministry of Finance announced the extension of the full 15% tax credit program until the 2009 taxation year.
The announcement is positive recognition of a program that has invested close to $3 billion in hundreds of small to medium sized private enterprises throughout the province; and a clear indication that the LSIF program plays a key role in the promotion of Canada’s entrepreneurial community.
What This Means For Your Clients
The announcement means that you will be able to increase your clients LSIF purchase amount to $7,500 effective immediately; therefore, enabling them to gain up to $1,875 in tax credits (15% Provincial tax credits on $7,500 + 15% Federal tax credits on the current maximum of $5,000). To further maximize their purchase, investors are able to “double up” their purchase in the first 60 days of the calendar year; thereby providing them with a $15,000 investment and $3,750 in tax credits.
Ontario LSIF Tax Savings Chart –
1. Maximum annual investment amount eligible for tax credit is $7,500. The first $5,000 of the total $7,500 investment will receive a 15% ($750) Federal tax credit. The full $7,500 investment will receive a 15% ($1,125) Provincial tax credit.
2. First 60 day purchase of $15,000 allows for tax credits on an annual investment of $7,500 (15% Provincial tax credit on the first $7,500 & 15% Federal tax credit on the first $5,000) to be claimed in the current taxation year and the remaining 30% tax credit on the final $7,500 (15% Provincial tax credit and $5,000 Federal tax credit) for the following year.
It is hard to imagine how anyone would loose by contributing to RRSP. Take this example of Inam (name changed) who is 55 yrs old, earns $60,000 and has to 36% income tax (Marginal Tax Rate). She pays tax $12,960 yearly. She asked me if I could help reduce her tax burden, she did not believe in saving plan or RRSP. Here is my game plan
She has a RRSP room of $10,000 on her salary which she never used. If she contributes to this she gets a tax refund of $3600 ($10,000 x 36% MTR).
1. Her tax burden is reduced from 12,960 -3,600= $9,360
2. He actual total saving is RRSP contribution of $10,000 + $3,600 tax saving= $13,600. That $3,600 is kinda free money, it would have gone to revenue Canada. She can amplify this tax saving by compounding it.
3. Suppose she DRIPS back the tax saving into her RRSP too. The compounding of this money will benefit her greatly, you will see.
4. In 10 years (@ 12% growth) her annual savings of $13,600 will grow into $ 238,662. All of this is tax free growth. There is a lot of b.s. about having to pay tax when you withdraw RRSP growth. Please give me a break, who would be foolish enough to withdraw $238,660 in cash. Crazy myth about RRSP.
5. After 10 yrs she will be 65 and eligible to take early retirement. With her RRSP tax deferred balance of $238,662 she will buy a Guaranteed Life Minimum Monthly Income Plan or fixed life annuity plan (like a RRIF). This is the most popular route for many in North America. In US they call this, variable annuity.
6. On $238,662 @ 12% for 15 years she will get $2864.35 monthly till she is 80.
7. Inam's total annual income after 65 is $34,372, ($2864 x 12 months) she will be subject to tax on this amount not the entire RRSP amount. Withdrawals are subject to tax, minimum withdrawals attract no taxes.
8. This is only an illustration and does not include CPP, OAS, DSPS and other retirement benefits, claw backs and tax credits.
9. Self directed RRSP monitored and implemented by a financial planner is the best way to ensure a peaceful and easy retirement plan.
Quote:
Originally posted by investpro
Ok this info is for all even though VJ asked for it
January 2, 2007, the Ontario Government announced that it has increased the maximum investment amount eligible to receive 15% in tax credits to $7,500.00 Additionally, the Ministry of Finance announced the extension of the full 15% tax credit program until the 2009 taxation year.
The announcement is positive recognition of a program that has invested close to $3 billion in hundreds of small to medium sized private enterprises throughout the province; and a clear indication that the LSIF program plays a key role in the promotion of Canada’s entrepreneurial community.
What This Means For Your Clients
The announcement means that you will be able to increase your clients LSIF purchase amount to $7,500 effective immediately; therefore, enabling them to gain up to $1,875 in tax credits (15% Provincial tax credits on $7,500 + 15% Federal tax credits on the current maximum of $5,000). To further maximize their purchase, investors are able to “double up” their purchase in the first 60 days of the calendar year; thereby providing them with a $15,000 investment and $3,750 in tax credits.
Ontario LSIF Tax Savings Chart –
1. Maximum annual investment amount eligible for tax credit is $7,500. The first $5,000 of the total $7,500 investment will receive a 15% ($750) Federal tax credit. The full $7,500 investment will receive a 15% ($1,125) Provincial tax credit.
2. First 60 day purchase of $15,000 allows for tax credits on an annual investment of $7,500 (15% Provincial tax credit on the first $7,500 & 15% Federal tax credit on the first $5,000) to be claimed in the current taxation year and the remaining 30% tax credit on the final $7,500 (15% Provincial tax credit and $5,000 Federal tax credit) for the following year.
RRSP versus extra mortgage payment
Many people say that paying off your mortgage is more important than contributing to an RRSP. There is actually some truth to this. If you carry a lot of mortgage debt you essentially have a highly leveraged position in the real estate market, which carries a lot of risk. If interest rates rise a lot you might wind up with an interest payment that you cannot afford--paying down your mortgage reduces this risk, and is therefore often a sensible move. Once you've paid down the mortgage enough that you have effectively eliminated the risk, though, the RRSP is likely a better choice.
In this case the reason is that the returns available to you through an investment in your RRSP are simply higher than the returns available through your mortgage. The "return" on your mortgage payment equals the interest rate available on your mortgage: Let's say, 6% (as I write this the current prime rate; you can get a mortgage nearer 5% right now but the higher number biases in favour of the mortgage payment, so let's use that). The return on your RRSP is likely higher than that, since you can invest in equities as well as bonds. Only if you were so risk adverse that you were absolutely unwilling to invest in equities at all would the RRSP and mortgage be equivalent--and therefore, the mortgage better, since it also lowers risk. For an investor who is willing to hold some equities, and who has made an adequate down payment so as to have avoided serious risk from an interest rate rise, the RRSP has a better return.
Let's calculate it, assuming a mortgage interest rate of 6%:
RRSP:
$1000 pre-tax to invest becomes a $1000 RRSP contribution.
Over 15 years it grows to 1.1^15 * $1000 = $4177.
You withdraw it and pay $4177 * 36% = $1503.81 in tax.
You have $2673.44 to spend.
Mortgage:
$1000 pre-tax becomes a $640 mortgage payment after tax
Extra payment builds equity of $640 * 1.06^15 = $1533.80
You are $1533.80 better off.
So, due to the lower rate of return, the mortgage only left you $1533.80 better off than you were, while the RRSP grew to $2673.44. Note, though, that the RRSP involved an equity purchase--much higher risk than paying down the interest on your mortgage. If you are able to meet your financial goals with the rate of return available on the mortgage than the mortgage payment really may be better for you--but not in terms of expected return.
What happens if I am a CONSERVATIVE investor?
If you are a conservative investor the in that case where the mortgage payment beats an RRSP: When you invest in bonds in your RRSP you'll get a lower rate of return than your mortgage. That's because your mortgage rate is higher than you would get from a government bond, and yet the mortgage payment has less risk. So if you hold a mortgage you are better off putting any money you had intended to invest in bonds into your mortgage instead.
Hope this helps
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