RRSPs: Advice from an expert
We spoke with Barry Penner, Senior Wealth Advisor at SCU and Credential Securities, and asked him about common RRSP questions members have, and the best ways to save for the future. Here's what he had to say:
Q: What RRSP questions are you asked most often?
A: I receive a lot of questions about RRSPs and their value. The most common questions clients ask are, “Should I be putting my money into an RRSP? Should I use an RRSP or TFSA to save? And when should I start withdrawing from my RRSP?” The answer to these three questions is, it depends. There is no right or wrong answer, but rather, it depends on what life stage you are at and where you are on your financial journey.
Q: Do you hear any myths about RRSPs?
A: There’s a common misconception that RRSPs aren’t beneficial because you’ll have to pay a lot of tax when you withdraw funds. RRSPs are a valuable investment because you contribute to them when you’re working and your income is higher, so you receive tax benefits on your contributions. Then, when you’re no longer working and begin to draw on these funds, your income is lower, so you’ll pay less tax overall.
As with many financial decisions, everyone’s situation is different, so working with an expert will help you determine what mix of investments is best for you.
Q: What factors affect your investment mix?
A: The most significant factor when determining the best investment mix is how close you are to retirement. The best mix depends on your goals, and these are often based on your age, income, and stage of life. As your needs change, so should the mix of savings and investment products change to support these new goals. If you plan to purchase a home, your savings plan will differ from someone who is planning to retire soon. I would recommend speaking with an advisor regularly to evaluate your investment mix and assess whether your plan best meets your short-and long-term goals.
Q: Should I contribute to my RRSP or pay off my mortgage?
A: Deciding whether to pay down your mortgage or contribute to an RRSP depends on what savings options you are using for your RRSP investment. If you’re a more conservative investor and use a variable savings rate option for your RRSPs, it may make more sense to pay down your mortgage in a low interest-rate environment.
Q: When creating a plan to save, are RRSP loans a good idea?
A: Creating a plan to save is simply about taking the time to identify your goals (what you’re saving for) and developing a savings strategy to achieve your goals. A great option is to set up regular preauthorized deposits, a set it and forget it tactic. You can either put these funds into a variable savings account, a TFSA, or directly into an RRSP.
If you’re in school and trying to save, RRSPs may not be your best option as your income is lower and the tax benefit is nominal. If you’re trying to buy a home or get a jump on your retirement savings, RRSPs are a better option. Taking an RRSP loan that you can then pay down using your tax return is an option but consider also setting up a regular preauthorized debit for your ongoing RRSP needs.
Sometimes it’s not about the numbers, but your personality. If taking an RRSP loan is the only way to be disciplined enough to save, then a loan can be good, but it’s always better to save and set aside the funds. You should also consider the interest you are paying on your loan versus the interest you’re receiving on your RRSP. If, for example, you’re paying 3% interest on your RRSP loan* but are earning less than 3% interest on your RRSPs, you may want to consider a different savings strategy.
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*Using borrowed money to finance the purchase of securities involves greater risk than purchasing using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines.
Credential Financial Strategies Inc. is a member company under Aviso Wealth Inc., offering financial planning, life insurance and investments to members of credit unions and their communities. Your insurance contract will provide details of the coverage available under the plan you choose. Restrictions may apply. ®Credential is a registered mark owned by Aviso Wealth Inc. and is used under license.