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Rob Carrick discussed RRSPs

Globe and Mail Update

What? RRSP deadline day is March 1? That's next week!

Yep, all of a sudden it feels like Christmas is just around the corner and you haven't even started shopping, doesn't it? Panic is setting in. There's still so much to do, so many unanswered questions: How much can I contribute this year? Can I deduct interest and fees paid for my RRSP? If I lose money in my RRSPs that are mutual funds, can I claim these losses on my return?


RobGlobe business columnist Rob Carrick was on-line earlier today to take your questions on RRSP season, and he even dispensed a little advice, such as what to watch out for when building your retirement plan with those on-line calculators some financing Web sites provide.

Rob Carrick has been writing about personal finance, business and economics for more than 12 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, Mr. Carrick 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. As personal finance columnist, Mr. Carrick writes a widely read annual rating of on-line brokers. On-line investing is an area of particular interest for Rob, who has co-written a book, which is available on E-Investing: How to Choose and Use a Discount Broker. Another book, this one on essential investing Web sites, was published in early 2002.

Editor's Note: The same rules will apply to this live discussion as normally apply to the "reader comment" feature. 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, Hello Rob, thanks for joining us today and welcome Globe readers. We've got a lot to cover today, lots of questions already, so let me get to it with the first question: Rob, should people be structuring their RRSP portfolio based on their age? How important is it to do that?

Rob Carrick: Age is crucial. If you're decades away from retirement, you can afford to take a riskier stance that should make for higher long-term results, while also incurring risks that might bring some nasty declines every now and again. As you get closer to retirement, you need to become more conservative and limit the potential for a stock market downturn to decimate your retirement savings. Think about it &Mdash; a 20-per-cent market decline over two years might not set you back too much at age 30, but at age 62 it could be disastrous.

Denis McAuliffe from White Rock writes: I would like to invest on the foreign side this year, but how do I deal with the currency movements. Do I buy a hedged fund or bet the dollar will slide a bit?

Rob Carrick: Dennis: Many professional money managers — those at the Templeton fund family, for example mdash; believe that there's no point in trying to guess where the currency is heading. To them, you buy the best stocks possible and let the ups and downs of currencies cancel themselves out over time, as they tend to do. The other approach is to buy hedged mutual funds, index funds or exchange-traded funds, which offer the returns of a particular index or stock portfolio with the impact of currency moves removed. I'm partial to hedged funds, myself. I like the idea of making what the index makes and not having currency moves cloud things up.

Paul Pedersen from Ottawa Canada writes: My wife and I have a portfolio of RSPS in both spousal accounts as well as fund accounts in our own names. Unfortunately for me as the larger salaried person in the household and the one to have a larger pension income on retirement and facing the prospect of being taxed at a higher rate for any RSP or RRIF withdrawals in retirement, is there any way I can transfer RSP funds from my own RSP accounts to my wife's personal or spousal account without incurring any taxes?

Rob Carrick: Paul: Best to check with the administrator of your RRSP accounts on this one, but I'm not aware of any mechanism under which you can transfer assets from one RRSP into another. On the other hand, you can make "in kind" contributions to an RRSP by transferring in assets held in non-registered accounts.

Dale Hughes from Richmond Canada writes: Yes, I'd like to know if interest on mutual fund loans and/or losses on mutual funds can be claimed on tax returns? What about RESP's?

Rob Carrick: Dale: Fees and loan interest incurred on registered accounts are not tax deductible, and that goes for RESP accounts. If you borrow to buy funds in a non-registered account, or if you incur losses from funds in a non-registered account, then you can claim these amounts in completing your tax return.

Kevin Brimble from Bowmanville Canada writes: My understanding is that one can have a $2,000 over contribution in their RRSP at any time. Does this mean my child (under five years old) could get a headstart on the power of compounding by contributing now and use the overcontribution clause since they have not had any income to base the maximum allowable contribution limit?

Rob Carrick: Kevin: Remember, RRSP contribution room is calculated against earned income, which for most people means salary or employment income. Your child would need this to be able to put any money at all in a plan. People with family businesses can get around this by putting family members "on the payroll," but doing so with a child of under five might be pushing it. Best to save think about RRSPs when your child starts working (good luck make the case for an RRSP contribution).

M Fernandes from Toronto writes: Hi Rob, my husband and I are looking into purchasing our first home in the next year or so and would like to use the Home Buyer's Plan to make our down payment. We currently have two separate individual RRSP accounts, he has already reached his $20,000 threshold and I'm going to meet mine in a few months as well. He is in a higher tax bracket than I am. The question that I have is, if we were to open a spousal RRSP account instead where he's the contributor and I am the annuitant, then: 1. Would I be able to withdraw the funds from the spousal RRSP as my HBP instead of using my individual RRSP account? 2. If yes, when we start repaying, whose tax return would the repayments be on? 3. While it seems like we will be saving taxes at a higher rate using a spousal RRSP for my portion of the HBP down payment, is there a catch somehow?

Rob Carrick:M. Fernandes: Given that your husband would be the contributor in the case of a spousal RRSP, not sure if you would be able to make withdrawals to make use of the Home Buyers Plan. Best to check that with your plan administrator. Repayments, in any case, would apply to the person who made the contributions to the plan.

Marisa Zwan from Toronto writes: What is the best savings route to take for young professionals who want to buy a home/condo in the next few years and not get taxed on their savings? I know that with the Home Buyers Plan one can use up to 20K from his/her RSP and after the 2 year grace period that money must be repaid within 15 years. I don't want to lock all my money up in an RSP if I am saving for a home but I also don't want to get taxed while I am saving for a home. Is there any way around being taxed on my savings beyond the 20K mark?

Rob Carrick: Marisa: Technically, yes, there are investments that would help you partially or largely avoid taxes on your savings. For example, only half of capital gains are considered taxable, and some income trusts produce monthly income that has certain tax advantages. The problem here is risk. In exchange for avoiding some taxes, you subject your home-saving fund to market risk that could hurt your ability to afford a home on whatever schedule you're looking at.

Timeframe is important here — if you plan to buy a house in a couple of years, then think about playing it safe and investing the money in a taxable high-interest savings account. If you're looking at 5 to 10 years, then the tax advantages of more risky investments might have some appeal. The Home Buyers Plan gives you shelter from the tax problem, of course, but you're also locking yourself into a 15-year stretch of annual repayments.

Allan Chapman from Victoria Canada writes: I may need to turn a significant portion of my RRSP into cash. If I cash in my RRSP now, do I create future 'RRSP' room for that amount such that I can rebuild the RRSP in the future?

Rob Carrick: Allan: I suggest you check this, but I don't think you can make up for contribution room you used and then gave back, so to speak, by withdrawing funds from your RRSP.

Drew A from Ottawa writes: What advice do you have for investors such as myself that find it important that their retirement savings are invested ethically? Are there ethical options out there that are particularly suitable for RRSP's? It seems that the big banks don't really offer this option, where can I find an RRSP that may be a match with some general ethical principles like not investing in the arms industry, or supporting exploitative labour practices overseas?

Rob Carrick: Drew: Good news. The ethical mutual fund category has been lacklustre — to be charitable — for many years in Canada, but things are looking up. There are good funds in the Ethical, Acuity and Meritas fund families, to name a few, and you should be able to build an entire RRSP portfolio out of these products. The Ethical family is owned by the credit union movement, which means you should be able to stop by most any credit union branch to buy them.

Kevin Spikes from Toronto writes: I contribute to my RRSP each year but don't max them out. I cant help thinking I might be better off paying down my mortgage faster with the money I currently contribute to the RRSPs although my bank financial planner would never suggest it as he is paid on assets under management. I have 11 years left on my mortgage at current interest rates and am making accelerated payments. I will be 52 when it's paid off. Wouldn't it be better to pay it off in 5-6 years and save all those interest payments and then when its paid off, start topping up my RRSP?

Rob Carrick:Kevin: In the old days, when mortgage rates were high, there was a clear argument for killing off your mortgage as soon as possible. Today, many people have mortgage rates around 4 per cent, while they're earning 7 to 10 per cent in their RRSPs.

Another spin on this is that you could take all the money you now pour into mortgage payments and direct it into your RRSP once the mortgage is paid off. But then you'd be missing out on the tax-free compounding available in the years when you're focusing on your mortgage and not your RRSP. A compromise suggestion: Use your RRSP-generated tax refund to pay down your mortgage balance.

Ben C from Mississauga writes: Hi Rob, I am 30 years old and have been maxing out my RRSPs for 5 years now. Basically, I haven't set foot in a bank or looked at my RRSP statement since I opened it. I want to take a more active roll in where my money goes within my RRSPs. Where should I put my money? I am not averse to risk, but I also don't feel like losing everything I've saved. Help, and thanks! Ben in Mississauga

Rob Carrick: Ben C: Congrats on being smarter about retirement saving than 95 per cent of your peers. One thing, though. You should be checking your account at least every 12 months to make sure you're properly diversified and that everything is ship shape. As for taking an active role in managing your money, I think a discount broker might be an option worth considering. You can buy mutual funds, exchange-traded funds, stocks and bonds, so you have the ultimate in flexibility, and the commissions are rock bottom.

If you think you'd be better off with professional help, ask at your bank if there are any planners you can meet with. Re specific investments, a 30-year-old can afford to take an aggressive stance with lots of exposure to the stock market, but some bond holdings are still a good idea to take the edge off any stock market downturns.

David Smith from Toronto writes: My wife and I are in our mid-thirties with a two-year-old child. I have about $25K in RRSPs and hold a job with average pay and a good pension. My wife stays at home and does not have any RRSPs. We have yet to set up an RESP. Given this scenario what would you suggest be our priority - establishing a spousal RRSP, an RESP or both?

Rob Carrick: David: Do both. If you focus on one, you'll regret the lost time on the other later one. RESPs are like RRSPs in that you get the best bang for your buck when you start early, but the lifespan of an RESP is much shorter. A child might start drawing on an RESP when she turns 18, but your RRSP will go untouched until age 65, or thereabouts.

Louis McEniry from Mississauga writes: Hi Rob, Thanks for taking the time today. I have things generally worked out with a targeted 15 years till blast off (retirement that is). I am reasonably well informed with a financial background but certainly face some uncertainty. Presently I use a combination of my bank and its discount brokerage. I am thinking I will have my plan and assumptions reviewed by a Financial Planner available through my bank. Beyond this, my main concern moving forward are overall returns and asset allocation of my portfolio. I don't want to mistakenly rely on the 'canned' answers via Internet tools, but I also don't want to pay a fortune for the same. In your opinion, how might I best address this concern? I guess I may be looking for someone to hold my hand and say, your plan is good, but you should do more of this.

Rob Carrick:Louis: You're the sort of investor that the financial industry does not serve very well. You want a second opinion and professional input on a portfolio you're doing fine in running yourself, whereas what the financial industry wants to do is make you a full client (and big-time payer of fees and commissions).

I suggest you follow up on your own idea of consulting a financial planner at your bank. Make it clear you don't want a sales person to foist products on you, but rather someone to provide true financial planning. The problem here is compensation for the planner — if you're a major client of the bank, this may not be a problem. Otherwise, you may need to either generate some fees and commissions, or be prepared to talk to an independent fee-only adviser, who would charge a set fee for a plan, or an hourly rate for a consultation.

Ken Norris from Creston BC writes: When contributing to an RRSP, first there is the principal amount invested and then there is interest or earnings on this amount, when redeeming your moneys out on retirement you are taxed on the how much you withdraw on a percentage basis of the total amount, How does the revenue dept separate your original investment from the interest earned? Its like paying taxes on this amount twice?

Rob Carrick:Ken: Let's assume you're taking money out of an RRSP in retirement. Taxes would be paid on the withdrawals according to the marginal tax applying to your total income for the year. There's no distinguishing between the principal amount you invested and the interest or earnings — it's all one combined fund of money that is taxed like your salary was when you worked. By the way, you avoid double taxation on RRSPs through the tax deduction the government provides on your contributions.

A P from Ottawa writes: Okay, here's a silly question: When they recommend that one should have $X at the time of retirement (I usually hear $1 million), do they mean as a household or each retiree?

Rob Carrick:AP: Darn good question, and one I've asked people in the financial industry before. They've told me in most cases that each individual needs that $X amount, but I'm skeptical. I think the old adage about two living as cheaply (if that's the right word) as one has some merit. So while $X might not be enough for two people, 2x$X is probably overkill.

Paolo Zadra from Toronto writes: Hi Rob, I always enjoy your columns. Some people have questioned the use of RRSPs for non-fixed income investments since you will be taxed on an income basis rather than a capital gains basis upon withdrawal. During the election campaign, the Conservatives pledged to defer taxes on capital gain that are reinvested within six months. What are your thoughts on the future of RRSPs in this type of environment? Do you think RRSP contributions will decrease overall, with people continuing their RRSP contributions in fixed income investments but not bothering with RRSP contributions non-fixed income investments?

Rob Carrick: Paolo: Thanks for reading the column. I think RRSPs will remain what they are right now when/if the conservatives follow through on their election promise re capital gains, which is the best and primary way for the masses to save for retirement. To take advantage of the Conservative plan, you'd have to be a savvy, aggressive investor who is capable of profitably managing a portfolio of stocks or equity mutual funds.

How many investors qualify here? Not a heck of a lot, I'd say. The best alternative is an RRSP — you can't get into trouble with one of these.

Colin Lee from Waterloo writes: I am presently working in Canada and have an RRSP already up and running, but what happens to that if I move to another country? Would it depend on the country? Thanks.

Rob Carrick:Colin: Yes, the country you live in would have a bearing on things. If you do end up moving, be sure to get some tax advice on how best to manage your RRSPs. Robert Boyd from Toronto writes: Few foreign equity markets (except I think Japan, of late) are doing as well as Canadian markets, which are going like gang-busters right now. Also, our dollar keeps rising . . . . One might argue that there are few better places to invest in mutual funds than in Canada right now. So what does this mean for foreign content? Is it better right now to ignore the usual theories on foreign content and stay Canadian (for now), while markets here are doing so well?

Rob Carrick: Robert: I think that savvy investors are looking beyond Canada, despite the recent outperformance of our stock market and our dollar. Sooner or later, the tables will turn and Canada will lag. At that point, investors who have a decent level of global exposure in their portfolio will make out best. That said, I certainly wouldn't bail on Canada or anything like that. The strong economic fundamentals in Canada, and this country's strength in the all-important oil and resource sectors, provide some underlying strength.

Michael Snider, Well, that's about 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

Rob Carrick:Thanks for all the sharp questions. Financial industry types are sometimes a bit cynical about the knowledge level of individual investors, but the people who participated in this forum seem to really know their stuff.


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