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ANALYSIS: It’s all-out war this month as the investment industry battles for your registered retirement savings plan contribution – and the first casualty of war is the truth.
Here are five common RRSP myths debunked:
1. You must invest your contribution by the February 29 deadline: Wrong. You only have to contribute by this year’s deadline to be able to apply it to your 2015 taxes. You can park your contribution and invest later, or use it for future tax years. Once you decide, you can invest it in just about anything, or keep it in cash. No rush.
2. Registered retirement savings plans are a tax exemption: Wrong. RRSPs are tax deferrals and there's a huge difference. An exemption is forever. A deferral means you will have to pay tax at some point in the future. An RRSP is a temporary tax shelter that allows the plan holder to delay paying taxes on contributions until the money is withdrawn. RRSPs are popular because they allow savings to grow tax free until the plan holder is in a lower tax bracket -- normally retirement.
3. You should contribute the maximum allowable amount: Not always. If the amount is too high in retirement, the government could claw back your Old Age Security benefits. Claw-backs can be avoided by income splitting where taxable income is split with a lower-income spouse. There is also a risk income taxes could be higher when the time comes to withdraw. There's also a strong argument for young investors to delay making RRSP contributions until they are in their higher income years and the tax savings are bigger.
4. You must take advantage of your maximum allowable contribution the year it is issued: Wrong. The difference between the allowable amount and what you contribute can be used in later years. You can carry forward any amount you want.
5. You cannot make a withdrawal from your RRSP until you retire: Not true. Money from an RRSP is available to the plan holder at any time, but it's important to know it will be taxed at the going rate. The government allows exemptions such as the Home Buyers’ Plan, where the plan holder and spouse can each borrow up to $25,000 provided the funds have been on deposit at least 90 days. Repayment must begin no more than two years later, with at least 1/15 of the funds paid back each year (15 years). The offer is only available to first-time home buyers.
The Lifelong Learning Plan also allows investors to withdraw up to $20,000 tax free for full-time training or post-secondary education. The full amount must be paid back within 10 years.
Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI