Are RRSPs really the best way?
It’s the time of year that everyone loves to hate – tax time. I often have business owners ask me the best way to contribute to their RRSPs and they usually ask the same three questions:
- How do I achieve a zero owing tax balance?
- How do I maximize my refund?
- How do I achieve the maximum benefit according to my Notice of Assessment from the previous tax year?
Remember, RRSPs are taxable and so once you invest money into an account, you’ll be unable to touch it in the short-term. What if you need that money for business improvements or personal use? Yes, the Canadian Government has programs like the Home Buyer’s Plan and Education Plan, but unless you’re dead set on putting this money away for the long term, there are other ways to invest in your future. What I’m saying is that the three points above are not necessarily the most important to consider if want your money to ‘work’ for you because RRSP investment is really a tax deferral. You may see immediate profits on that money today, but you’ll end up paying the same (or more) taxes on that money later.
When investing in these types of accounts, you need to ask yourself these three things:
- What are you expecting to make in retirement? Do you plan to maintain your current lifestyle?
- What will tax rates be when you withdraw the funds in the future? The income bracket you’re in today might not be the same 30 years down the line.
- What do you need the money for? Is it for retirement? Investment? Keep in mind that when you invest in an RRSP, your money is in ‘jail’ unless you pay major penalties to access it early.
The bottom line is that even though you may see a short-term tax benefit now, there’s a long-term cost associated with investing in RRSPs. I prefer taking a more nuanced approach where you diversify your investment portfolio. The right real estate investment may provide a much better rate of return. In low-risk areas, the stock market can provide steady rates of return and you can access your investment whenever you wish. I always encourage my clients to do proper research and make sure that they don’t become reliant on one savings formula. Becoming educated about how to invest your assets will make you feel in control of your financial destiny!
Consider that you have alternatives for the future and that RRSPs aren’t the only place to safely invest your money. There’s a host of other places that have many benefits, but without the right guidance, can have some disadvantages. If you’d like to find out more about how to put a robust investment plan together, please fill out the questionnaire below, and we’ll be happy to connect with you about your long-term goals.
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