The Colour of Money

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Dear Dharma,

Being a “Grown Up” sucks. I’m trying to wrap my head around RRSP’s and find that I end up more confused than anything.  I understand that RRSP’s are a tax free retirement savings plan that you can put a certain dollar amount in per year.  I also know that most employers offer an RRSP contribution plan.  But what happens when you end up moving jobs and have worked with multiple companies that have this?

Do RRSP’s follow you?  Do they just float around in a big RRSP cloud that collects all the RRSP’s attached to your name/social insurance number?

Should I have a personal RRSP account that I move the company RRSP’s to when I change companies?

How do I do transfer them, and how do I track down plans that I may not have remembered in my younger years?

Arggh! Finances and responsibility hurt my head!

Grownup Headaches

Dear Headaches,

I think I might want to add something to my Disclaimer page stating that Dharma in no way should be considered a financial advisor.  I can send you my bank statement to prove it…

But since you asked and we really do try to answer every question that comes in, Dharma used the Call a Friend option and consulted an expert in the industry

So here’s what we know!

RRSP’s are a deferral of income to a future date. Canadians can defer up to 18% of their previous years gross income, the maximum being $24,930 for 2015.  RRSP’s will grow tax sheltered during the accumulation phase but these accounts are taxable when the individual withdraws them at their marginal tax rate for that year.  The concept is that someone will defer income to the future when they will be earning less and be in a lower tax bracket.

When someone moves jobs they will typically receive an Options Statement letting them know that they can keep their money with the current provider or transfer the money to another institution… or in some cases withdraw the funds subject to tax.

Canadians can have as many RRSP accounts as they wish but it does make sense to combine the guts and feathers from various employers into one account.  Eligible amounts are tied to each person’s SIN. (Dharma says – hahaha, guts and feathers, that’s funny)

To consolidate funds a person first needs to choose a financial planner or investment specialist that can prepare the appropriate transfer and account forms.  Money can be ‘sold’ with different compensation models for the advisor – front end load or back end load (DSC) – make sure you ask the advisor how they are paid and that you understand the consequences of the advisor compensation and your flexibility to change advisors in the future if you wish.

Always speak to more than one advisor before choosing and make sure they have a ‘Certified Financial Planner’ designation.

Okay, to me, that mostly made sense – how about you?  I was good right up to the front/back end whatever loading I have no idea what you are saying part…  That just sounds dirty, but hey, whatever, what do I know… I’m not very good at this part of life either.

However,  I do think our financial expert does a great job in answering most of your questions, and I think as you continue to learn more about the wonderful world of RRSP’s, it will seem less daunting and give you less headaches.  For sure one of the drawbacks to being a grown up, but on the flip side, nothing beats licking the peanut butter off the knife and not getting yelled at, right?

For more information on Dharma’s financial guru, check this out.

Dharma

 

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6 Comments

  • Mr. Finance says:

    Keep cash under your bed

  • sunshine471 says:

    i used to be super confused about all this stuff too – but once I organized everything and became familiar with what I had and where, it got easier. I want a Financial Guru too!!!

  • Ed Grimley says:

    this is sure an interesting discussion, for a boy who is very excited about money, I must say!
    I am saving all the extra change i find in the sofa from Dad’s pockets, and I also get to return the empties!
    Plus I get to deliver pappers after my next birthday too!
    Soon i will be filthy with the riches! and all will bow down in despair and then I will be the guru of the so called financials!!

  • Georgia says:

    RRSP’s are great to have, especially if your employers kicks in some cash towards them. The money WILL follow you around if you leave a company. Normally you open your own RSP account, give your info to your employer and they make contributions to this existing account. If they have helped you set up the account it is still in your name and when you leave a company talk with their HR department and make sure that you get all of the account details etc.. If you have more than one RSP account you can roll the money into one which makes it much easier to track and manage.

    Keep in mind, it really doesn’t make sense to have more than one or two RSP accounts. Think of them like bank accounts- you don’t need more than one or things get too complicated! .

    Now here is something to consider: RSP’s are often a very poor investment. First of all, they suck you in by giving you a little tax break now but when you withdraw the money later you WILL have to pay tax. Years down the road the tax rate may be very high. The idea of RSPs was that when you withdraw the money later in life you will be retired and your income will be lower. That worked 40 years ago but things have changed and more people are having to work later and you will possibly be in a higher tax bracket than you figured when you start to having to withdraw the funds. There are some good plans out there so I am not saying all RSP’s suck but the bank ones are usually not that great. .

    Second of all, most people buy RSP’s from a bank. The bank makes a profit off of those RSP’s (and other bank products like loans and mortgages) and they pay that money out to their stock holders. Rather than buying an RSP from a bank, you are much better off to start buying bank stocks: it is actually pretty easy! You can buy and sell bank stocks online and you can do it under a Registered TFSA account which I will tell you about below. The goal would be to buy and hold the stocks- not flip them like a bad Hollywood movie featuring Leonardo DiCaprio. But I digress. If you start young this can be a very awesome way to be comfortable in your future. Bank stocks (and many other stocks, too) pay dividends (which is kind of like interest, usually paid out quarterly). You reinvest the dividends to help grow more holdings. Yep, stocks are subject to fluctuating markets but so are things like dollar value, interest rates, mutual funds, and many RSPs. Bank stocks are particularly stable- Banks like the Bank of Montreal paid out dividends even through the Great Depression and WW2!

    Now, lets talk about TFSA. They are a Registered Tax Free Savings Account, like a big umbrella under which you can purchase all kinds of things like mutual funds, Bonds, ETFs, GICs, bank stocks etc…With a TFSA you do not get a tax break now, but after you have built up a pretty little nest egg and want to withdraw the fund they are totally tax fee. It is much better to pay now than face an uncertain tax rate. If you put money into a TFSA you must remember that it has to be moved in to another product or it will sit there doing nothing. Once it is in your TFSA you can buy investments.

    It may be best for you to do a bit of both: open up a TFSA account as well as an RSP account.

    TD Waterhouse (I think it is called TD Wealth now) have free hour long courses that help new investors learn how to use their TFSA accounts to full potential. I am sure that most of the banks that have an investment center also offer sessions like this, you can phone and ask.

    You sound like a very intelligent and forward thinking person- I am sure you will do very well with your future earnings. The whole financial world is confusing but asking questions is the first step! Good luck!

Whether you agree with Dharma or think she missed the mark on this one, leave a Comment!

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