Dan: Hi Rob. I worked this past year for a company that had a mutual fund for an RRSP and the fund hasn't exactly done very well and has a fairly high MER. Since I am no longer working there, I only contributed for a year (total is about $3500) and I have a fairly hefty line of credit to go along with my student loan, should I pull the money out of the mutual fund and pay off some of my debt? I have no idea what kinds of costs will incur.
Rob Carrick: Hi Dan. I wouldn't give that mutual fund the chop without first doing some research on it. A bad year? Almost every fund was *&^% last year. I'd be more interested in how it did in the past five or 10 years. Use Globefund.com to check it out. If the long-term results are good, then it might be worth hanging onto this little retirement savings building block of yours. Sure, you can make a defensible case for taking the money out (assuming there aren't any complications here...there could be) and paying down debt. But if you have $3,500 in good little fund and have 20 years to go until retirement, you would end up with almost $9,300 assuming a modest 5 per cent average return. Oh, and what it your mutual fund is an overpriced dud? Now, your escape plan starts to make sense. General rules on selling mutual fund investments: watch out for redemption fees if you bought on a back-end load basis (no upfront sales commissions), or if you bought just a few months ago. Think hard about dumping stuff that's down in price. You're selling low, remember.
Roslyn: In order to live decently, I own a fair amount of income trusts. Do you think I should switch to REIT as they will not be cancelled in 2011?
Rob Carrick: Roslyn, your question will be of interest to the many investors who have continued to hold tight to their income trusts despite many travails. I think you need to do some research for each of your trust holdings to see what the future may hold. Have your trusts announced plans to convert into a dividend-paying corporation? Has management given any indication of how well it will be able to cope with the income trust tax that starts in 2011? I think you have to look on a trust-by-trust basis and not sell everything. As for real estate investment trusts, or REITs, they are protected for the most part from the new trust tax. Again, though, you need to look carefully in the REIT sector and not generalize. Some REITs hold commerical real estate -- offices, motels, strip malls, industrial space -- and have been hit hard in the recession. REITs offer some pretty high yields these days, but there's risk there, too.
Saving money, bank accounts, RRSPs, TFSAs
David: I've done some reading into the subject and there seems to be a lot of buzz around the TFSA as opposed to the RRSP. Could you explain the pros and cons of both and what the major differences are?
Rob Carrick: Hi David, I understand your confusion. Tax-free savings accounts are brand new and they're being heavily marketed. All of a sudden, it appears that RRSPs have a hot new competitor. Truth is, in a perfect world you would contribute to both. The RRSP would offer you tax-deferred savings that you would only draw upon when retired. The TFSA would be a tax-sheltered savings vehicle that you could draw upon in emergencies, to pay for big expenses in the future or, ultimately, to supplement your RRSP savings.
A quick primer on the differences:
- -people 18 and older can contribute up to $5,000 per year
- -no tax deduction for the contribution, but all investment gains are exempt from taxes.
- -you can contribute if you have earned income, and your limits depend on your salary and whether you're in a company pension
- -you get a tax deduction on your contributions, and pay no tax on your gains
- -taxes apply on your withdrawals when retired.
TFSAs offer amazing flexibility in that you can put back what you withdraw (you have to wait until the next year, though), and you're free from the worry of taxes. RRSPs are less flexible, but maybe that's a good thing. We all need retirement investments that work on the idea of putting money in and leaving it there until we finish our careers.