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Tuesday, February 28, 2006

There's still time.

RobDeadline for contributing to retirement savings plans is Wednesday midnight, but many people still have questions. Globe business columnist Rob Carrick was on-line earlier today to answer your last-minute questions on contributing to an RSP.

Recently, Rob's written about what to watch out for when building your retirement plan with those on-line calculators some financing Web sites provide. He was on-line answering questions last week, as well.

Rob Carrick has been writing about personal finance, business and economics for more than 15 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.

After starting his career at The Canadian Press in Toronto covering general news and business, Rob moved to CP's Ottawa bureau, where he served as senior economics writer and covered the Department of Finance.

He holds a Bachelor of Arts in political science from York University, an Honours Bachelor of Journalism from Carleton and is a graduate of the Canadian Securities Course. Rob is the author of two investing books, E-Investing: How to Choose and Use a Discount Broker and The Online Investor's Companion: 50 Essential Financial Web Sites. He is at work on a third book that will appear early in 2007 on getting the best value for your dollar on financial products and advice.

Editor's Note: The same rules will apply to this live discussion as normally apply to the "reader comment" feature. globeandmail.com editors will read and approve each comment/question. Not all comments/questions can be answered in the time available. Comments/questions will be checked for content only. Spelling and grammar errors will not be corrected. Comments/questions that include personal attacks, false or unsubstantiated allegations, vulgar language or libelous statements will be rejected. Preference will be given to those who ask questions under their full name, rather than pseudonyms.

Michael Snider, globeandmail.com: Hello Rob and welcome back. Thanks for joining us again, and thanks readers for tuning in as well. I have sort of an off-the-wall question to start you off.

We're about 36 hours until deadline and I'm still waiting for one of my T4s to arrive. I usually like to do my taxes before making my final RSP contribution for the year so I can get make up any shortfall and put the money away rather than give it to the government. But without that last statement I've had to guestimate on exactly how much I'll owe (while muttering obscenities) and it occurred to me that if the deadline was another week away, or businesses issued T4s earlier, then I could avoid this problem.

I know I'm not the only person who likes doing this (informal office poll), but I'm curious if there's been an effort beyond the Average Joe's complaining to change the deadline. Any idea?

Rob Carrick: I've heard complaints about just about everything in my years as personal finance columnist, but the date of the RRSP deadline wouldn't make the Top 20. There is an argument to be made that the RRSP deadline should be synched with the tax-filing deadline, but it doesn't seem to be on the minds of a lot of investors.

Here's an alternative idea: a mandated deadline for companies to provide T4s to employees. I say Feb. 15 at the latest, so people have ample time to assess their tax position and make the necessary RRSP contributions.

Jos Leclerc from Drummondville writes: My wife makes withdrawals from RRSP presently. And she still has a substantial amount left. I have not put any in mine and have a big amount that I could put in RRSPs. Can I buy under my wife's name without her being penalized?

Rob Carrick: Jos, have you considered a spousal RRSP? You make the contribution and get the tax break, but your wife owns the RRSP. Note, this is generally done when one spouse is expected to be in a higher tax bracket than the other in retirement. The higher-bracket spouse makes RRSP contributions to the lower-bracket spouse with the ultimate aim of paying less in taxes.

Heather A from Vancouver writes: My savings are greater than my RRSP contribution limit. Which investments should be inside my RRSP, and which ones should I make outside?

Rob Carrick: Heather, the general rule here is to keep interest-paying investments inside your RRSP for sure because interest is taxed as straight income. Dividends benefit from the newly enhanced dividend tax credit, so there's an argument for keeping them out of an RRSP. The most obvious choice for non-RRSP investing are stocks that you own primarily to generate capital gains or, in other words, appreciate in value over time. Only half a capital gain is taxable, and under an election campaign promise by the Conservatives, you would be able to defer even this reduced level of tax as long as you bought new stocks to replace the ones you sold.

Michael Maser from Gibsons writes: Hello Rob, I prefer to plunk my RRSP contribution in socially responsible funds. But I have the following question: When I was recently perusing holdings of the various SRI fund choices (of which there are only a few in Canada, unfortunately) I saw some very suspect companies on their lists — including some that received a very low grade in the Globe's ROB-mag Corporate Social Responsibility report card published last week.

When I questioned this with my adviser she assured me that fund managers sometimes take on some really questionable holdings in order to attempt to influence (and shift) company SR policy. Such 'missionary work' sounded like a long-shot to me, and I wonder what your thoughts are on this. I've already made my selection for 2005 but I'll be checking into this issue in the future.

Rob Carrick: Michael, I don't buy the "missionary" argument. What I think is happening here is that you're running into the subjectivity inherent in defining what makes a company socially responsible.

In order to find "ethical" companies, fund managers use screens that weed out companies in sectors like weapons, nukes and tobacco sectors while also including those with strong records in areas like environmental responsibility, community involvement, treatment of employees and such. Some companies might not make one SRI fund company's screens, but do fine in another screening process.

J. Doupe from Calgary writes: I have heard frequently that it is recommended to hold equities outside of an RRSP. I believe this is for tax reasons but don't understand why.

Rob Carrick: J, the argument for holding equities outside an RRSP is that only half your eventual capital gains will be taxed, whereas 100 per cent of any money you withdraw from an RRSP will be taxed. In the end, equities held outside an RRSP could well cost you less in tax than an RRSP withdrawal.

Ben C. from Mississauga writes: Hi Rob, I own two different non-registered mutual funds at two different banks. My plan was to transfer each non-registered fund into my RRSP accounts at each respective bank. Bank 1 allowed me to do so as long as I kept the fund in tact... this transfer would then count toward my RRSP contribution. I believe they called it a 'share transfer'.

Bank 2 told me I could do no such thing. Instead, I would have to sell my non-registered fund (and thus be taxed on my capital gains — which would be counterproductive to what I'm trying to do), and only then could I contribute to my RRSP account. Who is in error here? Is this a question of individual bank policy?

Rob Carrick: Ben, these sorts of transfers are not uncommon. So I have trouble understanding why Bank 2 wouldn't allow the transaction, as Bank 1 did. I suspect you've run into a not uncommon problem when dealing with banks and other financial firms, which is the poorly informed customer service person. Confronted with something they're not familiar with, or which sounds complex, they often just say no. I suggest you ask to speak to a senior customer relations person at Bank 2 and ask again to make the transfer.

Tommy B from Niagara on the Lake writes: Hi Rob; I am very happy you can take the time to help us all out — not just today, but regularly in your column. Last time on-line you mentioned looking beyond Canada is a sound strategy, even though our market is and has been going gangbusters lately. You also mentioned that one shouldn't abandon Canadian markets altogether. I am looking at your article I clipped for my wife a while back re: ETF's for RRSP portfolio building, and am wondering if you could briefly let us know what your thinking is on this strategy today? With an emphasis on foreign markets?

Rob Carrick: Tommy, I continue to believe that foreign exposure is a good idea, and that you can effectively get this exposure through ETFs. There are two ETFs listed on the TSX that offer hedged exposure to the S&P 500 and MSCI EAFE indexes, which is to say that both give you the returns of the indexes they track without distortions caused by the Cda-U.S. exchange rate. Either would be a perfectly viable way to get exposure to foreign markets for an RRSP.

If you want more variety in global terms, use the filter function on Globeinvestor.com to look at ETFs listed on the American and New York stock exchanges. Both are home to dozens of ETFs that track regional global stock indexes (ie: Europe, the Far East) or individual countries.

For Canadian exposure, you have many good choices. There's an ETF that tracks the S&P/TSX 60 index of blue-chip stocks, one that tracks the broader S&P/TSX composite and a new one that tracks the highest-yielding dividend stocks on the TSX. Again, Globeinvestor.com has the details.

David Smith from Toronto writes: Hi Rob. How many and what type of funds would you suggest be included in a portfolio under $30K, whose primary goal is long-term growth? Thanks.

Rob Carrick: David, four or five funds should do it. Maybe a bond fund, a Canadian equity fund, a global equity fund with solid U.S. exposure and then something else to liven things up, maybe an income trust fund, for example, or a small-cap fund.

James R. from Niagara Falls writes: What would be the minimum contribution you think should be put into a RRSP per week/month?

Rob Carrick: James, that's a hard one to answer because a person's RRSP contribution room depends on the amount of their employment income and whatever pension they might be enrolled in at work. In a sense, you could say that the ideal monthly contribution would be one-twelfth of your total annual contribution room (you can find out your total annual room using the notice of assessment that the Canada Revenue Agency sent you last year). Kudos to you for thinking in terms of monthly contributions. Never understood why more people don't contribute this way, rather than scrambling at the end of February each year.

M. W. from 604 writes: Hi Rob, I have been in my comfort zone with mutual funds and want to go into a more self directed plan with ETF's in particular. Do you have any advice?

Rob Carrick: MW, might I suggest that you consider a mix of mutual funds and ETFs? Your funds, if they're conservatively managed, might offer better protection of your money if the stock markets take a fall (certainly a possibility after three great years). ETFs, of course, would drag you down as far as the indexes fall.

That said, ETFs also tend to outperform a majority of funds in many different categories over the long term, so they certainly have appeal. Note: there are more than 200 ETFs listed on the Toronto, NY and American stock exchanges right now, but you probably only need about four or five of them. Look to TSX-listed ETFs first.

Michael Snider, globeandmail.com: That's all the time we have today. Thanks for joining us Rob and we hope to see you again soon. Readers, thanks again for taking the time to submit questions. Certainly, if you have any thoughts about the Discussion format or would like to see a particular reporter/columnist invited on or a particular subject covered, let us know. You can email your thought to msnider@globeandmail.com

Rob Carrick: Thanks for all the smart questions, and best of luck in your RRSPs for 2006.

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