RRSP's....

T

Terminator2000

Well-known member
Jun 16, 2007
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I currently find myself with a good amount of money in my bank. Alot of grands.

I want to invest all this money so that my money will start making money all by itself.

Can anyone explain RRSP's so maybe I can understand what happens when I put a couple grand in RRSP's and know how much money it'll make over how much time?
 
I just have a basic knowledge of RRSPs...

You might want to call the CRA and find out what your max contribution is, because if you put in more then that then they tax you.

If you need to withdraw the money later on for a house, the government allows you to take $20K out tax free for the down payment of the house you are buying.


Most banks reccommend you invest over time rather then a lump sum. Personally I think they do that just so they can pad their pockets. The more money you have in there for a longer period of time, the more interest you gain.

The money you make really depends on what the interest rate is and various other factors.
 
You need to talk to your banker or some other type of investment advisor. There are 2 considerations for RRSPs; 1) the tax implications of putting money into, then ultimately withdrawing money from the RRSP account, and 2) what type of investments to purchase with the money, e.g. mutual funds, bonds, stocks, GIC's etc etc. Your mid to long term needs will impact what you do with your extra money.
 
Andy Stitzer said:
Go to the government web page to get the basics, then go to Chapters and get a book. Never get financial advice off some forum.
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don't forget the bank is in there too! Never trust a banker either. Do some research, go to the bank, read some books and then decide what you want to do.
 
Here's how RRSPs work:

1) Every year, CRA taxes you on your level of income. Say 40% on 100,000 = so you paid 40,000 in taxes. Over the year, this amount was deducted from your paycheques.

2) Now say you have $20,000 in RRSP room (CRA tells you yearly how much you have - either that or just call em)

3) Now you go to etrade.ca or investorsedge.cibc.com and set up an RRSP account, and deposit the $20K into your RRSP account.

4) This $20K counts against your yearly income (should you choose to deduct it) and so as far as they're concerned...your income was only $80K.

5) Because of the way our tax system works, lower incomes get taxed at lower rates. So let's say the tax rate is only 30% for an 80,000 income = so you should have only been taxed $24,000.

6) But you paid $40K in taxes, so CRA mails you a cheque for $16,000. If you want to play around with this, CRA's PDOC (just google it) will give you an accurate # for taxes deducted based on your income. Just plug in different numbers and look for the line called total taxes deducted.

7) Note that the RRSP should not be withdrawn before 65. If it is, then it's treated like regular income.

8) How much can you contribute in a year depends on how much you earned in the previous year. Every year, after you file your tax return, CRA mails you a notice listing your RRSP room.

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If you want to know how much money your portfolio will make, it depends on what investments you choose. You can buy stocks, mutual funds, ETFs or just GICs. There are other exotic stuff but those are the bulk of the market. Mutual funds spread out the risk but they charge a fee (2-4%) yearly. Generally, only about 25% of mutual funds outperform the market.

A good start is moneysense.ca. They have a couch potato portfolio that is fairly conservative, low in risk and slightly above average in returns...which is what any investor can ask for, given how uncertain and volatile things are presently.

Which is why I'm mostly invested in indexed ETFs - they perform the same as the market and don't charge 2-4% either.

A good rule is the so-called rule of 72. Say if something is earning you 10% a year. 72/10 = 7.2 years. The rule says that if you take $10,000, earn 10% every year and reinvest the earnings every year...it'll take 7.2 years to grow to $20,000.
 
wetnose said:
4) This $20K counts against your yearly income (should you choose to deduct it) and so as far as they're concerned...your income was only $80K.
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You don't have much choice about choosing to deduct it. If you put the money into the RRSP in January, Feb, or March you can choose which year it will deduct against--the one just past or the one just started.

7) Note that the RRSP should not be withdrawn before 65. If it is, then it's treated like regular income.
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It's treated like regular income before or after 65. The only thing that happens at 65 is they start forcing you to withdraw it. The proper rule of thumb here is that you should not draw it out while you have other income--only when you are retired, or if you are unemployed.

The real problem with withdrawing before 65 is that you don't get the RRSP "room" back, you've burned it, and since there is a tax advantage in investing in an RRSP it's better to have as much money in the RRSP as possible so the early withdrawl hurt you a little.

As for the return on investments...

I agree that COST MATTERS! Whether you invest in bonds or in stocks or GIC's you want to pay the smallest amount in fees you can. I don't really believe there are better stock pickers out there so if someone is charging you a 3% fee on a fund the difference between that and a cheap index fund is the 3% fee you're paying.

Stocks can lose money, even if you are widely diversified, if thhe market crashes everybody goes down. So only put as much into stocks as you can stomach--imagine how you'd feel if you lost 30% of your stock holdings, that is a very real possibility. If you would be mortified then put more in short-term bonds / GIC's and less in stocks, until the potential loss isn't mortifying anymore.
 
I max out my RRSP room every year; then when I get my tax refund, I re-invest it. Trust me, it pays off in the long run. (Use the rule of 72)
 
Fuji is right on all counts. Man, it's been a long time since my introductory tax course.

Be very careful with investing in individual stocks - it is certainly tempting to go chase after the latest and best thing or pick up on someone's hot stock tip...but certainly not on your RRSP, which is really your life savings.

After you've done your big RRSP contribution, also consider setting up an automatic deduction from your bank account - that way your monthly contribution is whisked away and you can't get your paws on it. Trust me - your 65 year old self will thank you for it.
 
Compromised said:
Extra money? You need a Hobby.
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lol, thats why north america is going down the toilet, 70% of ppl are living in debt when were the richest nations in the world
 
wetnose said:
Fuji is right on all counts. Man, it's been a long time since my introductory tax course.

Be very careful with investing in individual stocks - it is certainly tempting to go chase after the latest and best thing or pick up on someone's hot stock tip...but certainly not on your RRSP, which is really your life savings.

After you've done your big RRSP contribution, also consider setting up an automatic deduction from your bank account - that way your monthly contribution is whisked away and you can't get your paws on it. Trust me - your 65 year old self will thank you for it.
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Note that the last day for contributions for tax year 2007 is Feb. 29th.

Note that the money just needs to be in an account - you can choose what to invest it in later.

Good point about investing in individual stocks, but ETFs like XIU (which tracks the TSX index) are low cost ways to invest in stocks. Most Mutual Funds have mucher higher costs buried into them (called MER).

Once you get your money invested, don't be a day trader.

Make sure you do research, including looking for an Investment Advisor if you go that way.
 
fuji said:
It's treated like regular income before or after 65. The only thing that happens at 65 is they start forcing you to withdraw it.

I don't really believe there are better stock pickers out there so if someone is charging you a 3% fee on a fund the difference between that and a cheap index fund is the 3% fee you're paying.
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Umm..no...First,the age that they force you to start withdrawing is 71.

Second, how can you make that comment about stock picking when the best stock picker of all time, Warren Buffet (sorry Peter Lynch), is still around. If you buy BRK, you get an instant actively managed portfolio and he charges you $0 for his work. Average return for brk is over 25%/year. A $10,000 investment into Berkshire Hathaway when Buffett took control in 1965 would be worth over $60 million today. By comparison, $10,000 in the S&P 500 would have grown to only $500,000. If you can't afford the $132,000/share for brk.a, he has a brk.b for just $4,400.

Also, I personally don't mind paying a higher management fee if the returns are there year after year. I have some investments that average 17%/year (after fees) over the last 10-15 years. I have even payed as high as 7% in management fees. Do I care? No, I got over 80% gain that year. If the performance is there, don't be so cheap.

Finally, there is a risk in being too cautious. The risk is outliving your money. There is a time to take controlled risks, especially if you are young. Even the CFA avocates that in some situations, 100% equity portfolio is ideal.

Having said all of that, I do follow the Treynor-Black Model, with the majority of my portfolio is market index, and has served me well over the years.
 
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Interesting comments Kona - I agree with the majority of what you say (and nice pick up on the 71 withdrawal - it was changed last year from 69 years old).

If you care to do your own research, I am sure that you can find decent mutual funds that offer consistently better returns over the the indicies - yes, you may pay management expenses (MERs), but the returns that are quoted in sources like globefund and morningstar are net of fees (meaning the fees are taken into account and the returns you see reported are the returns you would have actually received over that time period).

While some have mentioned getting a financial advisor in passing, I think that for the majority of Canadian investors, this is probably the wisest thing to do - studies have shown that the average Canadian spends less than 30 minutes thinking about their retirement each year whereas your financial advisor spends his life looking at the market and analysing investments.

Jus remember to ask questions - you want to learn. And make sure you book appointments - semi-annually should do it - it forces the advisor to review, keeps him on his toes and makes you available in case changes have to be made.

You can find a good advisor through the IDA (Investment Dealers Association) - but I would suggest a referral is the best way - ask someone you trust who handles their money and ask if they are satisfied.

Last but not least, know that you are going to pay this person to take care of your money - just find out beforehand how he gets paid and how much.

Timbit
 
fuji said:
You don't have much choice about choosing to deduct it.
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Actually you do.

If you have low income for a couple a years but anticipate a material increase in the future, you can carry forward the RRSP deductions even if you have made the contributions. Of course if you haven't made the contributions, you can carry forward the "RRSP room".
 
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