Diane Kennedy, CFP, Financial Planner, SISIP Financial, Comox
January always seems to be abuzz with talk of RRSPs and income tax; you hear about it on the news, at the dinner table, at work and of course, at your local SISIP Financial office, it is no different!
As financial planners, we are always extolling the tax advantages of RRSPs, but often hear “No thanks, I have a great pension plan, I don’t need an RRSP.”
While it is true that the Canadian Armed Forces (CAF) does offer an excellent pension plan, it is also true that no two financial situations are alike. Even though your friend or co-worker may have the same rank, monthly allotment and years of service as you, your financial needs and retirement goals may vary widely.
Significant Value to Your Financial Plan
RSPs can add significant value to your financial plan during your working years, in retirement, and within your estate plan. Whenever you contribute to an RRSP, it reduces your taxable income today, which means you pay less tax now and you are putting money away to grow, tax-sheltered, for the future. You can save even more money by strategically planning your RRSP withdrawals. Let’s look at some situations that people may not always consider when they think of an RRSP.
Is the cost of buying a home too high in your current province?
If you plan to buy a home at a future posting or in retirement, consider using the RRSP homebuyers program (HBP). The HBP is not just for first-time homeowners. You can utilize the HBP more than once, provided you and/or your spouse have not owned a home in the four years prior to the home purchase. You can “borrow” up to $25,000 tax-free, from both your and your spouse’s RRSPs to put towards the payment for your new home. By contributing to your RRSP, you can be saving toward your new home while receiving a tax deduction that you could then reinvest to compound your savings strategy.
What’s on your retirement bucket list?
If you are married or common law, you have the option of contributing to a spousal RRSP. This will reduce your taxable income today and create a future nest egg to which your spouse can withdraw as income in retirement. You can then allocate the spousal RRSP funds to pay for the fun stuff, such as travel, sports, and hobbies, while using your CAF pension to pay the monthly and annual household expenses (bills, maintenance and such).
Have you calculated survivor income needs yet?
Having funds in an RRSP can help fund any shortfalls in your estate plan. When a retired member passes, the surviving non-military spouse is entitled to a 50 per cent Survivor Pension. However, will that be enough to ensure your spouse has a comfortable income for life? Saving through an RRSP or spousal RRSP can help fund future income needs, not to mention that it will likely be taxed in a lower bracket.
These strategies all show different ways to reduce your income tax today and maximize the spending power of your RRSP contributions for the future. It also makes great sense to reinvest any tax refund you receive into an RRSP or a TFSA to help you achieve your financial goals sooner.
Make it your 2019 resolution to talk to a financial advisor at your local SISIP Financial office and ask how an RRSP can benefit your specific financial plan.
For more information on the HBP qualification reference, please visit here.