The Citizen, 2003-02-26, Page 13THE CITIZEN, WEDNESDAY, FEBRUARY 26, 2003. PAGE 13.
Financial 2003
Don't forget RRSP contribution at age 69
If you were bom in 1934, you
have until December 31, 2003 to
make your final Registered
Retirement Savings Plan (RRSP)
contribution. You are then required
to convert your RRSP, most likely
into a Registered Retirement Income
Fund (RR1F). But you can make one
more RRSP contribution - simply by
Use RRSP to shelter retiring allowance
If you have received a retiring
allowance due to the termination of
employment or in recognition of
long service, it is taxable in the year
it is received.
“However, you can defer taxes if
you directly contribute a portion of
the retiring allowance into your
Registered Retirement Savings Plan
(RRSP),” says chartered accountant
John Wonfor of Toronto.
Savings depend on tax braeket
The size of your tax savings when
you contribute to your Registered
Retirement Savings Plan (RRSP)
depends on your income tax bracket.
“If the tax deduction created by
your RRSP contribution is applied
against taxable income in the top tax
bracket, the tax savings created will
be more than double what they
would be if the deduction is made
against taxable income in the lowest
bracket,” explains chartered
accountant Paul Panabaker of
London.
Borrow to top up RRSP
Will you find it difficult to save
enough money this year to make the
maximum contribution to your
Registered Retirement Savings Plan
(RRSP)? If so, you may want to
consider taking out a loan.
‘The interest on the loan is not tax
deductible, but a loan may give you
the discipline you need to begin the
good habit of RRSP investing,” says
chartered accountant Tina Di Vito, of
Toronto. “If you apply the tax refund
generated by your RRSP
contribution to your loan, you will
be able to pay off the entire loan
sooner. After the loan is repaid,
continue to make the payment, but
pay it into your RRSP. The following
When tax rates fall
making it one month before you
convert your RRSP.
“This strategy only works if you
have earned income in 2003,”
stresses chartered accountant John
Wonfor of Toronto. “The first thing
to do is to make the maximum
$13,500 contribution to your RRSP
for the 2003 tax year. When
The amount eligible for transfer to
an RRSP is:
$2,000 for each year of full or
part-time service prior to 1996,
plus
$1,500 for each year of service
prior to 1989 for which the
employer’s contributions to a
Registered Pension Plan or Deferred
Profit Sharing Plan on the
employee’s behalf have not vested.
“For example, a $1,000 RRSP
contribution against $25,000 in
taxable income would result in tax
savings of approximately $220,”
explains Panabaker. “A $1,000
RRSP contribution against $110,000
in taxable income would result in tax
savings of about $464.”
While RRSP contributions in
higher income years represent larger
tax savings, Panabaker says the
reverse applies if you take funds out
of your RRSP. ‘Therefore, it may
make sense to withdraw funds in
year you’ll have to borrow less to
top up your RRSP, and by the third
or fourth year, you shouldn’t need a
loan at all.”
Di Vito adds that an RRSP loan
can also help you maximize your tax
benefits.
“For example, if you contribute
$5,000 to your RRSP this year and
your marginal tax rate is 30 per cent,
you should borrow $2,143, for a
total contribution of $7, 143,”
explains Di Vito. “An RRSP
contribution of $7,143 will generate
a tax refund of $2,143, just enough
for you to pay off the entire loan.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
December 2003 arrives, make an
additional $13,500 RRSP
contribution for 2004. Since you’ve
already made your maximum
contribution for 2003, the
government will consider this extra
amount an over-contribution, and
will penalize you, but only for one
month.”
“By directing the eligible portion
of the allowance into your RRSP,
you can defer tax and possibly avoid
withholding taxes that might
otherwise be deducted,” says
Wonfor. “Also, you can direct an
amount of your retirement
allowance equal to your available
RRSP contribution room to your
RRSP and avoid withholding tax on
this as well. In effect, this would be
low-income years, immediately re
contribute and delay claiming the
deduction until a higher income
year,” says Panabaker. “This strategy
works best when there is both
sizeable unused contribution room
and large swings in annual income.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
Put tax
refund
in RRSP
If you are expecting a tax refund
for the 2002 tax year and don’t need
the money to pay off debt, it may be
wise to put your refund into your
Registered Retirement Savings Plan
(RRSP).
“Making your 2003 RRSP
contribution before the March 1,
2004 deadline is a good idea,”
explains chartered accountant John
Wonfor of Toronto. “The income
earned inside your RRSP will begin
compounding tax-free earlier, and
you will avoid the last-minute rush
to make your contribution.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
The penalty is minor - between
$115 and $135. “Once January 2004
arrives, the extra $13,500 is no
longer considered an over
contribution, as each new year
brings about more contribution
room, assuming you had earned
income from the previous year,”
explains Wonfor.
a regular RRSP contribution.” Ask a - Brought to you by the Institute of
Chartered Accountant for assistance. Chartered Accountants of Ontario.
RRSPs can finance
education, training
Are you or your spouse in school?
If so, you may be able to make tax-
free Registered Retirement Savings
Plan (RRSP) withdrawals to help
finance certain education and
training programs.
“You can withdraw up to $10,000
a year from your RRSP - to a
maximum of $20,000 over four
years - to finance eligible education
and training,” says chartered
accountant John Wonfor of Toronto.
“In order to qualify, either you or
your spouse must be enrolled as a
full-time student in an education or
training program of at least three
months’ duration.”
RRSP contributions must remain
on deposit for at least 90 days
before being withdrawn to help
fund education or training
programs.
“To avoid taxation on the
withdrawals, you must repay the
funds to your RRSP in equal
instalments over 10 years,” adds
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“The penalty is a small price to
pay, especially when you consider
the extra contribution is tax
deductible and could result in a tax
refund. As well, you’ll have more
money in your RRIF to compound
over time.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
Wonfor. “The date of the first
repayment depends on when you
cease to become a full-time student,
but the latest you can start repaying
is 60 days after the fifth year
following the first withdrawal. You
can also participate in the plan more
than once, providing your previous
withdrawal has been fully repaid.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
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| Certified General
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Accounting & Tax Services
93 Wolfe St.
Goderich
524-5113
maximize contributions
When income tax rates are falling,
try to increase your contributions to
your Registered Retirement Savings
Plan (RRSP).
“During periods of declining
income tax rates, you should try to
maximize your RRSP contributions,
as opposed to waiting until a later
year when the taxes saved will be
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lower on each dollar of contribution,”
explains chartered accountant Mel
Grossman of Toronto.
“As well, the tax dollar saved today
is worth more than the same deflated
dollar a year or two in the fut
ure.”
- Brought to you by the Institute of
Chartered Accountants of Ontario.
LET US HELP YOU RETIRE
IN COMFORT AND STYLE
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FINANCIAL CONSULTANT
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CERTIFIED FINANCIAL
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MANAGER
RRSP DEADLINE: MARCH 3, 2003
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